Carvana Company (CVNA) has taken investors on a roller-coaster ride since its initial public offering (IPO) in April 2017. Soon after its listing at $15 per share, Carvana stock was trading down at $11 - then went on to touch a record high above $376 in August 2021.
The bear market of 2022, coupled with company-specific concerns about a potential bankruptcy filing, dragged shares of the used-car retailer to less than $5 in December 2022. CVNA currently trades just below $32, valuing the company at $6.39 billion by market cap.
Now that near-term liquidity concerns have been put in the rearview, let’s see if Carvana stock can gain momentum and deliver outsized gains to investors in the next year.
Inside Carvana's Latest Earnings
Carvana operates an e-commerce platform in the U.S. for buying and selling used cars. Demand for used cars surged significantly amid COVID-19, allowing Carvana to increase sales from $3.9 billion in 2019 to $12.8 billion in 2021.
However, in the past year, steadily rising interest rates and unrelenting inflation created a much more unfavorable operating environment. The company reported decelerating sales, rising expenses, and mounting losses. In fact, Carvana's operating losses surged 12x to $1.49 billion in 2022, and remain elevated at $820 million over the last four quarters. At the same time, gross margin is less than 12%, which suggests it doesn’t have much leeway to invest aggressively in organic growth or sales and marketing.
In Q3 of 2023, Carvana’s sales were down 18% year over year at $2.77 billion. It sold 80,987 vehicles in the quarter, indicating an average selling price of $34,205. Operating expenses for the period declined by 34% year over year to $433 million, driven by layoffs and lower ad spending.
Since Q1 of 2023, Carvana reduced non-vehicle retail costs of sales by $600 per unit and operating expenses by $400, indicating a $1,000 gain in unit economics in the last six months. But for the company to consistently report sustainable growth in sales, it will have to further lower costs.
Carvana restructured its debt, and lowered balance sheet debt by $1.2 billion while decreasing interest expenses by $455 million over the next two years.
Can Carvana Lower Its Cost Base Further?
In the last 12 months, Carvana reduced its transport costs per unit by $900 through a combination of insourcing, staffing normalization, proprietary software development, and logistics efficiencies. It has reduced retail and wholesale vehicle operating expenses by $1,400 per unit and ad expenses by $400 per unit in recent months.
Carvana emphasized it continues to operate with excess capacity across all components of its business. Its existing production and fulfillment infrastructure can handle a tripling of the current retail unit sold volume. As utilization increases, Carvana is positioned to benefit from economies of scale and an improvement in operating leverage.
Its wholesale marketplace auction lanes are operating at 62% capacity, allowing significant growth over time in this vertical.
What Is the Target Price for Carvana Stock?
Carvana stock has surged well over 500% year-to-date, making it one of the top-performing Russell 2000 Index (RUT) components of 2023. Out of the 21 analysts tracking CVNA, only one recommends “strong buy,” 16 recommend “hold,” one recommends “moderate sell,” and three recommend “strong sell.”
The average target price for CVNA is $38.12, which is 21% above the current trading price. Moreover, Wall Street has a high target price of $60, indicating a projected upside of more than 90% from current levels.
