After a lackluster performance in 2022, Carvana (NYSE:CVNA) stock has staged an astonishing comeback in 2023, outpacing its peers by a wide margin with a remarkable 904% surge. As investors wonder if Carvana’s soaring stock price is sustainable, let’s delve into the company’s fundamentals and valuation compared to its competitors.
Reasons Behind the Rally
Carvana’s stock (NYSE:CVNA) revival stems from a brighter financial outlook, reversing concerns of bankruptcy that led to an all-time low in December 2022. Notably, the company significantly narrowed net losses from $1.4 billion in December 2022 to $105 million in June 2023, a notable 93% improvement over the past six months. Moreover, the gross profit per retail unit nearly tripled to $6,520 in the second quarter, indicating a substantial recovery compared to the final quarter of 2022 when it was $2,219.
Furthermore, Carvana’s (NYSE:CVNA) debt reduction initiative, resulting in a $1.2 billion decrease in debt and an expected annual cash interest expense reduction of over $430 million for the next two years, is fueling optimism for the company’s path to profitability.
Macro Factors and Market Potential
Beyond internal improvements, Carvana (NYSE:CVNA) also benefits from optimistic forecasts for the online used car market. The U.S. online used car market is projected to reach $302.47 billion by 2027, up from $195.84 billion in 2021, presenting a favorable landscape for Carvana’s growth. With a market share of 19%, Carvana remains the second-largest player in the space, outpacing its closest rival Vroom with a 12% share, albeit trailing behind market leader CarMax, which holds 38%.
Lingering Concerns
Despite the impressive rally, Carvana (NYSE:CVNA) faces some critical concerns that may impact its future performance. Deliveries fell short of expectations in the second quarter, leading to softer sales figures. Retail vehicle unit sales declined by 35% to 76,530 units, resulting in net sales of $2.97 billion, down 23.6% from the previous year. This trend has persisted over the past fiscal year, signaling weaker demand for Carvana’s products compared to the previous year when revenues saw a substantial 129% jump.
Moreover, the company continues to grapple with legal challenges, with ongoing lawsuits from customers in multiple states concerning titles and registration issues.
Valuation Analysis
When compared to its peers, Carvana’s (NYSE:CVNA) valuation appears reasonable. The stock’s forward enterprise value/sales (ev/sales) ratio of 1.05 is in line with Vroom’s 0.89 and CarMax’s 1.18. The price-to-sales (p/s) ratio of 0.61 is higher than Vroom’s 0.15 but within the range of CarMax’s 0.44.
Analyst Outlook
Analysts project significant earnings growth for Carvana (NYSE:CVNA), with estimates indicating a 64.04% increase in earnings for the current quarter and a 51.04% rise for FY 2023. However, most analysts maintain a Hold rating on the stock, with a mean target price of $39.18, indicating a potential downside of about 15% from current levels. Out of 21 analysts covering the stock, one holds a Strong Buy rating, 15 have a Hold rating, and 5 suggest a Strong Sell rating.
Conclusion
While Carvana’s stock (NYSE:CVNA) performance is impressive, concerns remain regarding its underlying demand and debt burden. The consistent decline in revenue and unit sales raises questions about the company’s growth trajectory. Consequently, investors who have profited from the rally may consider booking profits and exploring alternative investment options. Meanwhile, potential investors should exercise caution when entering new positions in Carvana stock at its current levels.
Featured Image: Unsplash @ CHUTTERSNAP
Author Faith Yakubu 
