Carvana (NYSE: CVNA) investors have certainly experienced a rollercoaster journey. Initially, the online used car retailer witnessed a remarkable surge in its shares during the first four years post its 2017 IPO, propelling its market cap to a whopping $31 billion by August 2021. However, the company faced significant challenges due to macroeconomic headwinds in 2022, leading to a sharp decline in the stock, plummeting by 77% throughout 2022 and 2023.
But there’s a glimmer of optimism on the horizon. Carvana’s stock has staged a remarkable comeback, surging by an impressive 800% from February 27, 2023, to the same date in 2024, fueled by positive financial results.
The question on many investors’ minds now: Is it the right time to consider investing in Carvana?
Looking at the latest numbers
As of February 22, Carvana disclosed its Q4 2023 figures, revealing revenue and unit volume of $2.4 billion (down 15% YoY) and 76,000 units (down 13%), respectively. These results fell short of Wall Street estimates, marking the second consecutive year of declining volume for the company.
However, Carvana managed to impress its shareholders in a different domain. The company has been dedicatedly trimming costs, evidenced by a significant 34% reduction in full-year selling, general, and administrative expenses in 2023. The management’s emphasis on “right-sizing” operations has been instrumental in achieving this efficiency.
This cost-cutting focus has led to a noteworthy financial milestone for Carvana. In 2023, the company reported a positive net income of $150 million, a remarkable turnaround from the $2.9 billion net loss in 2022, providing a substantial reason for bullish investor enthusiasm.
Looking forward, Carvana’s management anticipates an increase in retail unit volume for both Q1 and the full year of 2024 compared to the corresponding periods in the previous year. This forward-looking statement has sparked excitement among investors.
Staring at a huge market
Carvana remains steadfast in its mission to revolutionize the car-buying and selling experience, undeterred by recent financial fluctuations. Despite the ups and downs, the company’s target market remains substantial, with 36 million used cars sold in the U.S. last year and the industry exhibiting significant fragmentation.
The key to winning over customers lies in enhancing the user experience, a goal that Carvana has prioritized. Its commitment to offering a swift, convenient, and transparent vehicle transaction process sets it apart in the market.
Acknowledging the substantial capital invested in building out its logistics footprint and creating a vertically integrated organization, Carvana’s leadership aims to leverage scale advantages. While these investments have been sizable, the company recognizes the expansive growth potential that justifies such capital outlays.
Notably, Carvana maintained its presence in 316 markets across the U.S. by the end of 2023, the same as the previous year. In a strategic move to bolster its financial position, the leadership temporarily halted growth plans. However, this approach may not be sustainable in the long run, as shareholders are likely to demand progress towards expansion.
The delicate balance between growth and profitability will be a focal point for investors in the coming years. Monitoring how executives navigate this equilibrium will be crucial for understanding Carvana’s trajectory in the dynamic automotive market.
High risk, high reward
As of now, Carvana’s shares are lingering at a level 78% below their peak from around 2 1/2 years ago, even though they have rebounded recently. Trading at a price-to-sales ratio of 1.2, slightly above the historical average, it’s crucial to approach this stock cautiously despite its resurgence.
While Carvana deserves credit for making strides in managing costs, it’s essential to note that its growth has hit a standstill. This underscores the company’s susceptibility to macroeconomic factors. The existing long-term debt burden of $5.5 billion adds another layer of concern, especially given the constant consideration of economic trends. In the event of a recession, Carvana could face significant challenges.
While the stock presents notable upside potential, the associated risks are too pronounced to overlook. This is why, at present, I’m opting to stay on the sidelines and refrain from making a purchase.
