Carvana Co. (NYSE:CVNA) has struggled over the last year of trading, moving down around 47% over the same period as it falls from all-time highs following a monstrous run-up from around $30 to over $375 in just around 3 years. Carvana specializes in operating an e-commerce platform for buying and selling used cars in the United States (Figure 1). Its platform allows customers to research and identify a vehicle; inspect it using company's 360-degree vehicle imaging technology; obtain financing and warranty coverage; purchase the vehicle; and schedule delivery or pick-up from their desktop or mobile devices. The company was founded in 2012 and is headquartered in Tempe, Arizona. Carvana has performed well throughout the pandemic and could continue to grow going forward as automotive supply returns to normal levels.
Figure 1. Carvana allows you to buy, sell, or trade vehicles and have them delivered directly to your door; much simpler than buying through traditional dealerships
At current prices, Carvana’s valuation could offer further downside of as much as 25% from current prices based upon comparisons to peers as slowing of blockbuster growth and as little as 20% upside if all continues to go well. This indicates that there may be better options in the online car buying industry such as CarLotz (LOTZ) or Shift Technologies (SFT) going forward.
Carvana trades at a Price to Sales ratio of around 0.8x forward revenue (Figure 2). This is higher than peers indicating the stock is expected to grow at an accelerated rate in comparison to competitors.
Figure 2. Shift Technologies looks to be the greatest value play going forward in the e-commerce auto sales division
Looking more towards growth we see that Carvana is growing at around 124% annually and is expected to continue into next year with around 61% forward growth. This is right around their competitors, although peers such as Shift & CarLotz may beat them out in coming years as they look to grab market share from Carvana (Figure 3). This is the primary reason why we feel there may be better opportunities in the industry for investors going forward is that Carvana trades as the growth darling of the sector but may not be the brightest light in upcoming years. Keeping an eye on this growth metric in comparison to peers will be crucial during earnings going forward to see if this is truly how everything plays out.
Figure 3. Carvana is expected to continue on with strong growth but may no longer be the leader of the pack.
Wall Street Analysts are behind Carvana as well with an average analyst rating of $350 signaling as much as 110% upside from current prices (Figure 4). Many of these price targets come from before the recent pullback and therefore will likely see bearish revisions in the not too distant future to reflect more sensible price targets.
Figure 4. Carvana has a number of bullish analysts behind them as well hinting at significant returns ahead
The combination of a premium valuation, downward momentum, and slowing growth make a strong case to avoid Carvana’s stock for the time being and look instead to competitors which offer similar growth at discounted prices.
Carvana currently has a debt of approximately $3.1 billion with around $2.6 billion of that being long-term debt and the remaining short-term debts. This does not look to be a huge issue going forward as they do bring in a large influx of annual cash but should be monitored going forward as always.
Based upon historical data and when looking at the charts of the Carvana’s stock it becomes apparent that there is a fairly strong line of support around the $90-100 mark dating back to pre-Covid highs. This would indicate as much as 20-30% downside risk still available going forward barring any further macroeconomic headwinds.
Carvana is an industry leader and the stock may be very attractive again soon if it can come down to the lower $100 price range, but for now it is just too rich for our liking. With a potential long-term downside of as much as 20-30% in an approximately 1-2 year time frame due to enhanced premium valuation, ongoing downward momentum and slowing growth, Carvana looks to be a tough investment going forward. In our opinion, there still could be around 20-40% long-term upside as the company is still a cash cow, and this should be taken into account when weighing risk-reward strategies. Carvana is a great company, but for investors looking to enter into the e-commerce car buying industry, there appear to be better options out there for the time being. We recommend Shift Technologies here, but would be interested in looking into Carvana below $120 or a market cap closer to $20 billion (price to sales <1.0x revenue).
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Disclosure: I/we have a beneficial long position in the shares of SFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.