Carvana (NYSE:CVNA)
So far this year, Carvana (NYSE:CVNA) has beaten almost every other company on the market.
The growth rate of the used-car internet marketplace was 434% as of June 16. That’s mostly because e-commerce stock had such low expectations going into the year since so many experts had written the business off as dead. Indeed, Carvana’s once meteoric expansion slowed to a crawl last year. When investors realized how bad the company’s financial situation was, the shares dropped by 99%. Carvana’s sales are leveling out.
The question of whether or not to invest in Carvana remains valid after its stock price increased by more than five times this year. Let’s weigh the case for buying, selling, and holding.
Buy Carvana
The revival of Carvana this year has received enough attention. The administration took swift measures to reduce expenses by drastically decreasing stock and conducting three layoffs. Consequently, the business’s adjusted profits before interest, taxes, depreciation, and amortization (EBITDA) came close to breaking even. The company astonished Wall Street by projecting an adjusted EBITDA of at least $50 million in the second quarter.
Even though the used car dealer’s projected profit was aided by the sale of receivables, the fact that it occurred is unmistakably positive. After a prolonged drop in 2022, the CPI data shows that used vehicle prices have begun to rise again, increasing by 4.4% in both April and May. Carvana has billions of dollars worth of automobile inventory, so the upturn should help the company’s bottom line.
The fact that 69% of the float was sold short as of the end of May indicates that many investors are still pessimistic about Carvana shares, which has helped drive them this year. Stock prices may rise further if short sellers are obliged to buy back shares as the company’s recovery continues.
Despite recent gains, Carvana’s stock price is still down over 90% from its all-time high.
Sell Carvana
It’s easy to understand why the stock market is full of doubters about Carvana. Avoiding insolvency and really running a successful company are two very different things. Carvana is now attempting to shed some of that load after taking on over $7 billion in debt to purchase the ADESA wholesale vehicle auction business.
Carvana must create substantial operating cash flow to counteract the negative effects of its high debt levels and the about $600 million in yearly interest payments based on its first-quarter performance.
In addition, it has yet to be shown that selling pre-owned automobiles via the Internet is a lucrative venture. However, competitors like Vroom have plateaued on the stock market, showing difficult problems in the highly competitive used automobile industry. At the same time, Carvana has never been profitable on a generally accepted accounting principles (GAAP) basis since it opted to invest in growth rather than profitability.
Carvana has a history of paying above-market prices for used automobiles; the firm may be working to change that perception, but it remains evident that it must place a greater emphasis on profitability if it is to remain in business.
Hold Carvana
There is a great deal of internal and external uncertainty for the firm shortly. Although management has shown competence in cutting expenses, the firm is nonetheless vulnerable to fluctuations in the secondary market and lending rates. Carvana might be in significant difficulty if interest rates keep climbing, used vehicle values keep falling, or a recession occurs.
Since the company is no longer trading in the single digits when its market size was over $1 billion, it still has tremendous upside potential. Still, it will be more difficult for it to generate multi-bagger gains. It’s likely to recover to its former glory in a while.
When Should One Act and Why?
Carvana stock is now in my “hold” category. The company’s turnaround is gaining steam but remains vulnerable to external influences. It will face challenges on the road to generating continuous free cash flow.
Nonetheless, Carvana stock’s potential for growth is evident, and the firm does enjoy substantial name recognition in a sizable market. The stock price will rise in response to actual profits being generated.
Although Carvana has seen its share price rise by 434%, the company still faces a lot of unknowns. Although the company is fighting back to stability, investors should prepare for further stock volatility.
Featured Image: Megapixl
