Carvana (CVNA) stock has done relatively well in the past two years, as the company shifted its business focus from growth to profitability. It soared to a high of $160 this year, its highest level since January 2022, and by over 4,000% from its lowest point last year.
Carvana has, therefore, become one of the best-performing companies in the United States as it has continued to outperform the S&P 500 and Nasdaq 100 indices. It has also beaten other car retailers like Vroom, CarMax, and AutoNation.
Carvana has also become a highly valued brand in the auto industry as its market cap has jumped to over $30 billion. It has become much bigger than AutoNation, which is valued at over $6 billion, and CarMax, which has a market cap of over $12 billion.
Carvana’s valuation means that it is bigger than AutoNation, Penske Automotive, and CarMax, which have a market cap of less than $30 billion.
This is even though Carvana makes less money and profits than the three firms. Carvana’s revenue in the trailing twelve months (TTM) stood at over $11.6 billion while Carmax, Penske, and AutoNation made over $27 billion, $29.8 billion, and $26 billion, combined.
Carvana is focusing on profits
For a long time, Carvana, like many other startups, was focused on revenue and market share gains.
By focusing on growth, the company spent so much money adding new locations at the expense of profits. In the aftermath, the company grew so fast but lost substantial sums of money in the process.
By focusing on growth, Carvana also became highly in debt, especially after acquiring ADESA USA in 2022. ADESA is a company that provides a network of auction sites in the United States.
As a result, its total long-term debt rose from over $864 million in 2019 to over $5.8 billion in 2022. This surge coincided with a period when vehicle sales were not doing very well in the country, leading to concerns that it would go bankrupt.
The last two years have been pivotal for Carvana as the company has turned its focus on profits instead of growth.
Carvana’s Q2 results download
In its last financial results, Carvana said that its revenue rose by 15%, helped by higher vehicle prices. Revenue came in at $3.41 billion as it sold 101,440 retail sales. This means that its average revenue per vehicle was about $33,615.
In contrast, Carvana sold 107,815 vehicles in the second quarter of 2021 and generated over $3.3 billion in revenue or $30,620. The company’s non-GAAP GPU was about $7,344, higher than the $7,000 it made last year.
The management believes that the company has more room to have profitable growth in the next few years. Its adjusted EBITDA for the year is expected to come in at between $1 billion and $1.2 billion, higher by $300 million from the same period in 2023.
Valuation concerns remain
Carvana has done well in the past few years as it has become one of the top vehicle sellers in the United States. Most importantly, it has started to turn a profit as the management shifted its focus from growth at all costs.
Additionally, the company has started to reduce its debt, leading to credit rating upgrade by S&P 500. These agencies note that the company is in a good position to pay its debt well. Its stock can also support this debt repayment.
In the last quarter, the company repurchased $250 million of its senior secured notes and also raised $350 million in equity. It hopes to have a healthy adjusted EBITDA growth.
However, there are concerns about Carvana’s valuation, which is still lower than its all-time high of over $60 billion.
Carvana is expected to have an annual revenue of $13 billion this year and $15 billion in 2025. In most cases, similar companies like Penske, CarMax, and Murphy USA have a net profit margin of less than 4%.
So, assuming that Carvana can have a profit margin of 4% and that its revenue rises to $20 billion in 2026, then it will make a profit of $800 million. These numbers mean that the company is trading at an estimated P/E ratio of 38, making it fairly expensive.
Carvana stock price analysis
On the positive side, CVNA shares have been in a strong bull run in the past two years. In this period, the stock has formed a series of higher highs and higher lows. Most notably, it has formed a golden cross chart pattern as the 50-week and 200-week moving averages have formed a bullish crossover pattern. In most cases, this pattern often leads to more gains.
The stock has also risen above the 38.2% Fibonacci Retracement point. Therefore, the stock will likely continue rising as bulls target the key resistance point at $200, about 40% above the current level and a few points above the 50% retracement level.
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