Carvana (CVNA) stock price has gone parabolic in the past two years, making it one of the best-performing companies in the United States. It soared to a high of $201.40, its highest level since January 2022, and 5,200% higher than its lowest point in December 2022.
Carvana’s turnaround has worked
Carvana has had spectacular growth in the past two years as it evaded bankruptcy in 2023. It has refinanced its finances and started to focus on profitability instead of growth at all costs.
These actions have left a company valued at over $42 billion, making it more valuable than most of its competitors, combined.
For example, CarMax has a market cap of over $17 billion, while Cars.com is valued at $732 million. Other top car dealerships like AutoNation, Asbury Automotive, and Lithia Motors are valued at $6.18 billion, $4.5 billion, and $9.7 billion.
The expensive valuation is a reflection of how far the company has come and the fact that its turnaround strategy has worked.
Most importantly, its strategy of selling cars online has worked, while most of its peers have either gone bankrupt or are struggling. For example, Vroom shares have crashed by almost 100%, bringing its valuation to just $15 million.
Other companies that raised millions of dollars and failed were Shift Technologies, Fair, Beepi, and Drivy.
Carvana’s resurgence is mostly because it is now selling more vehicles profitably. It sold 101,000 cars in the second quarter of this year, up from 81,000 in the previous period.
At the same time, its profitability metrics have improved, with its net income margin rising to 1.45, and the EBITDA margin moving to 10.4%. Most used car retailers don’t have such margins because they use a capital-intensive business model.
The most recent results showed that Carvana’s revenue rose by 15% to $3.41 billion as its gross profit jumped to over $715 million. Its net profit was $48 million.
Carvana earnings ahead
The next important catalyst for the Carvana stock price will be its earnings, which are scheduled for October 30th.
According to Yahoo Finance, analysts expect that its revenue will rise by 24% to $3.45 billion. Its earnings per share (EPS) will come in at 25 cents.
For the year, analysts see Carvana’s revenue coming in at $13.1 billion, a 22% increase from 2023. It will then make $15.24 billion in the next year. In the past, Carvana has delivered stronger-than-expected financial results, meaning that it will do better than estimates.
In the last earnings, the management guided to its adjusted EBITDA coming in at between $1 billion and $1.2 billion this year, a $340 million increase from last year.
Read more: Carvana stock price has more upside despite stretched valuation
Valuation concerns remain
The biggest concern for Carvana is that its business has become highly overvalued in the past few years.
This case is correct since Carvana has a forward price-to-earnings ratio of 328, which is higher than the sector median of 18. It is more overvalued than NVIDIA, a company that is growing faster.
However, using a P/E multiple for Carvana at this moment is not advisable since the company is in its early stage of profitability.
All we can do for now is to estimate its forward revenues and future margins to estimate its valuation. Analysts expect that Carvana will make over $15 billion in 2025, meaning that its revenue could get to $20 billion in either 2026 or 2027.
If it then gets to a net profit margin to 10% (highly optimistic), it means that its P/E multiple is about 21, which is still expensive. Its stock is also higher than the average estimate of $171.60.
Historically, companies with a strong market share tend to attract a higher valuation metric. Look at firms like Mastercard, Visa, and Moody’s.
Therefore, the company could maintain its valuation if it continues reporting strong results. This is highly possible now that interest rates have started coming down.
Read more: Carvana stock has tripled in 2024: Needham analyst sees further upside
Carvana stock price analysis
CVNA chart by TradingView
The weekly chart shows that the Carvana share price has been in a strong bull run in the past few months. It has jumped by over 5,000% from its lowest point in 2023.
Along the way, the stock has rallied above the 50% Fibonacci Retracement level at $190. It has also formed a golden cross chart pattern as the 200-week and 50-week moving averages have crossed each other.
The Average Directional Index (ADX) has remained above 40, while the Relative Strength Index (RSI) and the MACD have pointed upwards.
Therefore, the CVNA share price will likely continue rising as bulls target the all-time high at $377, which is about 87% from the current level. This view will be confirmed if it rises above the 61.8% retracement point at $235 and the 78.6% level at $300.
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