Carvana(NYSE: CVNA) has likely minted some millionaires since its initial public offering. The online used vehicle marketplace went public at $15 on April 28, 2017, and its stock price skyrocketed to a record high of $370.10 on Aug. 10, 2021, during the apex of the meme stock rally. Those gains would have turned a $50,000 IPO investment into $1.23 million.
Carvana's stock initially surged as used car sales skyrocketed in 2021. Low interest rates further buoyed that market while driving investors to place bigger bets on speculative growth stocks. The bulls expected Carvana's online marketplace -- which set firm prices, simplified the financing process, and helped shoppers "get the car without the car salesman" -- to become the "Amazon of cars." It also generated a lot of media buzz with its vehicle "vending machine" towers.
Image source: Carvana.
But by Dec. 27, 2022, Carvana's stock price had sunk to an all-time low of $3.72. Used car prices plummeted as the vehicle shortage turned into a surplus, inflation curbed consumer spending, and rising interest rates throttled auto loans. Those macro headwinds also highlighted its widening losses and popped its bubbly valuations.
Yet Carvana's stock defied gravity and soared back to about $183 as of this writing and likely minted even more millionaires. A $50,000 investment in the stock at its record low would have blossomed to $2.46 million in just over two years.
The bulls claim Carvana's gains are sustainable this time around, while the bears expect it to pull back as its growth cools off again. So should investors buy Carvana's volatile stock today and expect it to generate even more millionaire-making gains?
What happened to Carvana over the past few years?
There was a lot of pent-up demand for used cars during the pandemic. That's why the market heated up significantly when those headwinds dissipated in 2021. But in 2022 and 2023, Carvana's unit sales declined as inflation and rising rates chilled the market.
Metric
2020
2021
2022
2023
Units sold
244,111
425,237
412,296
312,847
Units sold growth
37%
74%
(3%)
(24%)
Revenue
$5.59 billion
$12.81 billion
$13.60 billion
$10.77 billion
Revenue growth
42%
129%
6%
(21%)
Data source: Carvana.
That cyclical decline was painful, but Carvana's growth accelerated again over the past year. In the first nine months of 2024, its units sold rose 28% year over year to 301,969 as interest rates declined and the used vehicle market warmed up again.
The company expects that momentum to continue in the fourth quarter with a "sequential increase in its year-over-year growth rate in retail units sold." That acceleration is being driven by its rising number of average monthly unique website visitors, which more than doubled from 8.5 million at the end of 2020 to 17.5 million in the third quarter of 2024, and its sales of cheaper vehicles. It also expanded its ecosystem by buying the online auction platform ADESA in 2022.
Carvana's revenue rose 21% year over year to $10.13 billion in the first nine months of 2024, while analysts expect 25% growth to $13.43 billion for the full year. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) -- which turned positive for the first time in 2023 -- is expected to nearly quadruple to $1.34 billion in 2024.
Carvana looks undervalued, but investors shouldn't ignore its weaknesses
With an enterprise value of $28 billion, Carvana stock still looks cheap relative to its growth potential at 2 times next year's sales and 16 times its adjusted EBITDA.
But it's also increased its number of outstanding shares by more than 150% over the past five years as it issued more shares to raise fresh cash and cover its stock-based employee compensation. It ended its latest quarter with $7.1 billion in total liabilities and a high debt-to-equity ratio of 24.7, which doesn't give it much room to raise more capital. Its biggest single buyer of auto loans, Ally Financial, recently warned of a growing number of delinquent loans in its automotive business.
Carvana's insiders have also sold more than three times as many shares as they bought over the past 12 months, and that chilly insider sentiment suggests its upside potential might be limited. Moreover, the prolific short-seller investment firm Hindenburg Research recently accused it of inflating its sales and gross profits. Carvana called those allegations "intentionally misleading and inaccurate," but that pressure has been weighing down its stock.
Could Carvana generate more millionaire-maker gains?
If Carvana scales up its business, grows its revenue at a compound annual growth rate of 15% from 2024 to 2034, and trades at a reasonable 3 times sales by the final year, its enterprise value could grow nearly sixfold to $163 billion.
That would turn a $50,000 investment right now into about $300,000 in a decade, but it would still fall short of the volatile millionaire-making gains Carvana achieved over the past eight years. So while I wouldn't call Carvana a millionaire-maker stock yet, it could be a great growth play for investors who can ride out a lot of volatility and tune out the near-term noise.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Ally is an advertising partner of Motley Fool Money. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
