During the 2020-2021 pandemic, a select group of companies experienced unprecedented growth and Carvana CVNA was one of them. Carvana, an e-commerce platform for buying and selling used cars, thrived when pandemic restrictions limited in-person car shopping. The company's stock soared during these years, reflecting heightened consumer demand and growth potential.
However, as the world returned to normalcy in 2022, Carvana's fortunes took a stark downturn. It faced a perfect storm of challenges in the form of rising interest rates, ballooning vehicle prices, heavy debt burdens and eroded profit margins. These factors led Carvana’s stock to plunge nearly 98% that year, leaving many investors questioning the company’s survival.
But against all odds, 2023 turned into a year of remarkable revival for Carvana, with the stock surging over 1,000% amid aggressive cost-cutting and a strategic debt restructuring. And the growth story just doesn’t seem to end. Year to date, the stock has rallied 354%, breezing past the broader market and its close peers, including CarMax KMX, AutoNation AN and Sonic Automotive SAH.
YTD Price Performance Comparison
Zacks Investment Research
Image Source: Zacks Investment Research
Carvana’s Strategy Shift Paying Off
Carvana’s CEO, Ernie Garcia, recognized that for the company to thrive again, it had to pivot from its aggressive growth focus toward operational efficiency and cash flow. The company rolled out a three-step strategic plan. The first step was achieving positive adjusted EBITDA, the second was boosting EBITDA per unit and the third step was returning to growth but with a leaner operating model. This shift in focus has been crucial to Carvana’s financial turnaround, restoring investor confidence and driving its meteoric stock rebound.
The transformation is visible in Carvana’s enhanced financial and operational metrics. A notable highlight is Carvana’s gross profit per unit (GPU), a key metric in the automotive retail industry. In the third quarter of 2024, CVNA’s GPU reached $7,685, an impressive increase from $6,396 in the year-ago period and $7,344 in the second quarter of 2024. To put this growth into perspective, Carvana’s GPU in 2016 was just $1,347.
Several factors contributed to the substantial rise in Carvana’s GPU. First, the company managed to cut retail reconditioning and inbound transportation costs by adopting in-house third-party services, streamlining staffing and standardizing processes. Additionally, proprietary software developments and better logistics network utilization helped reduce transportation distances, leading to further savings. Beyond these operational efficiencies, Carvana expanded customer sourcing options and added new revenue streams from value-added services, further boosting GPU.
As a result of these efforts, Carvana posted a record adjusted EBITDA margin of 11.7% in the last reported quarter, setting a new standard among public automotive retailers. With this margin in place, Carvana is on track to exceed its 2024 EBITDA guidance of $1 to $1.2 billion—up significantly from $339 million in 2023. The company’s ability to optimize costs associated with operations, inventory and labor—a challenging feat in the automotive industry—has played a vital role in achieving this impressive margin.
Surging Demand and Market Share Potential of CVNA
Demand for Carvana’s vehicles has remained strong. In the third quarter of 2024, Carvana’s retail units sold grew by 34%. The company anticipates sequential growth in retail unit sales in the fourth quarter of 2024. What’s important to note here is that Carvana, now the second-largest used car retailer in the United States, holds only about a 1% share in the highly fragmented used car market. This limited market share leaves significant room for expansion, particularly as consumer preferences shift toward online car buying — a trend that plays directly into Carvana’s strengths.
The macroeconomic backdrop could also support Carvana’s growth trajectory. With the Federal Reserve starting to cut interest rate cuts, financing used vehicles may become more affordable, boosting consumer demand. This environment would allow Carvana to capitalize on its e-commerce model and capture additional market share in the growing online auto retail sector.
A Look at Carvana’s Valuation
Carvana’s stock is trading at a premium valuation, reflecting high growth expectations.It's trading at a forward 12-month sales multiple of 3.17, higher than its peer group and its own 5-year median. But that pricey valuation is reflective of investors’ big growth expectations.
Zacks Investment Research
Image Source: Zacks Investment Research
What Do Our Estimates for CVNA Say?
The Zacks Consensus Estimate for CVNA’s 2024 EPS calls for a 39% uptick alongside a 24% sales increase. The consensus mark for CVNA’s 2025 sales and EPS implies a year-over-year improvement of 20% and 150%, respectively. Its EPS estimates have been northbound over the past 60 days.
Zacks Investment Research
Image Source: Zacks Investment Research
CVNA: Still a Compelling Buy
The price movement of CVNA's shares is truly astonishing, especially given how the company was largely overlooked post-pandemic. From trading below $5 at the end of 2022 to now hovering around $240 per share, this surge is nothing short of a fairy tale comeback.
Carvana’s turnaround story is a testament to its resilience and adaptability. In the span of just a couple of years, the company went from a pandemic darling on the brink of collapse to an e-commerce powerhouse driving record profits. As Carvana continues to optimize operations and scale its platform, its growth narrative remains compelling.
CVNA carries a Growth Score of A. The Growth Style Score takes projected and historic earnings, sales and cash flow into account to uncover stocks that will see long-term, sustainable growth.
Carvana’s differentiated business model, operational efficiencies and substantial market potential suggest that its current rally may still have room to run.
The company currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
