Is Carvana Stock A Buy, Sell, Or Hold As It Nears All-Time Lows? (NYSE:CVNA)

Elevator Pitch

I have a Hold investment rating assigned to Carvana Co.’s (NYSE:CVNA) shares.

Carvana is a Hold with its share price near all-time lows. However, CVNA isn’t deserving of a Buy rating; the recent metrics for the used car industry aren’t encouraging, and investors are staying away from cyclical and unprofitable names now. A Sell rating for the stock isn’t justified either, as Carvana has the potential to benefit from the consolidation of the used vehicle market in the long run, and it has cost levers to pull to improve the company’s profitability.

Why Has Carvana Stock Been Dropping?

Carvana, which refers to itself as “the leading e-commerce platform for buying and selling used cars” in its FY 2021 10-K filing, saw its share price drop by -90.4% year-to-date. In comparison, the S&P 500 has corrected by a more modest -19.8% in 2022 thus far.

In fact, CVNA’s shares fell to an all-time low of $19.80 during intra-day trading on June 13, 2022 according to S&P Capital IQ data. While Carvana’s stock price has subsequently rebounded to close at $23.11 as of June 29, 2022, its current share price is still only 16% above its historical trough.

The drop in Carvana’s stock price is mainly attributable to the negative outlook for the used vehicle market in a post-pandemic environment.

According to a June 9, 2022 New York Post article which cited data from “wholesale used car marketplace Manheim“, the price of used vehicles rose marginally by +0.7% in May 2022 following “four straight months of declines.” More recently, Cox Automotive’s mid-year report published on June 28, 2022 highlighted that the supply of used vehicles has increased by +7% YoY pointing to an easing of supply chain disruptions, while used vehicle sales on a rolling basis are -16% lower YoY which is likely due to weaker demand. In other words, the outlook for the used vehicle market isn’t good, and it is no surprise that Carvana’s shares are performing poorly.

In the next section of the article, I touch on the company’s key metrics disclosed as part of its most recent Q1 2022 financial results, which have also contributed to CVNA’s significant stock price drop thus far this year.

CVNA Stock Key Metrics

CVNA released its Q1 2022 financial results on April 20, 2022, and both its financial and operating metrics were disappointing.

Carvana’s net loss per share widened from -$0.46 in the first quarter of 2021 to -$2.89 in the most recent quarter. CVNA’s -$2.89 net loss per share for Q1 2022 was much worse than the Wall Street analysts’ consensus bottom line estimate of -$1.73 per share.

The company’s retail units sold grew by +14% YoY to 105,185 units in Q1 2022, but this represented a -7% decline on a QoQ basis. Also, the sell-side analysts had expected a much higher +21% YoY increase in retail units sold growth as per S&P Capital IQ. Carvana’s gross profit per unit or GPU fell -23% YoY to $2,833 in the most recent quarter, which was also -21% lower than the market’s consensus GPU forecast of $3,583.

At its Q1 2022 earnings briefing on April 20, 2022, CVNA noted that weak “affordability and general consumer sentiment combined to drive fewer industry-wide sales” which has hurt the company’s Q1 2022 financial performance.

I turn my attention to Carvana’s current valuations in the subsequent section.

Is Carvana Undervalued Now?

In light of CVNA’s poor stock price performance, it is relevant to review Carvana’s valuations.

Based on valuation data sourced from S&P Capital IQ, Carvana is valued by the market at consensus forward next twelve months’ Enterprise Value-to-Revenue and price-to-sales multiples of 0.50 times and 0.15 times, respectively. CVNA also trades at 18.6 times consensus forward fiscal 2025 normalized P/E, based on the assumption that the company becomes profitable by then.

Although CVNA’s valuations seem to be undemanding on an absolute basis, they are really a reflection of the grim prospects for the operators of e-commerce platforms for used vehicles. The market values Carvana’s closest peer, Vroom, Inc. (VRM), at even lower valuation multiples. VRM’s consensus forward Enterprise Value-to-Revenue and price-to-sales multiples are 0.42 times and 0.08 times, respectively. VRM isn’t expected to be profitable by FY 2025 (unlike CVNA) according to the sell-side’s consensus financial projections.

Furthermore, the current market environment favors profitable, non-cyclical companies which can finance their future growth from internally generated cash flow. Carvana doesn’t fall into this category; CVNA operates in the cyclical automotive industry and it is expected to be loss-making and free cash flow negative between FY 2022 and FY 2024. This explains why a hefty valuation discount for loss-making and cyclical listed companies like CVNA is justified.

In my view, Carvana is fairly valued, instead of being undervalued. The outlook for the used vehicle market is negative, and investors now prefer defensive stocks offering consistent profitability over their fast-growth, loss-making counterparts. As such, I think that CVNA’s current valuations are fair.

What Is Carvana Stock’s Long-Term Prediction?

Wall Street analysts’ consensus financial forecasts as per S&P Capital IQ point to Carvana generating positive free cash flow of $553 million and positive normalized net profit of $446 million in fiscal 2025.

The sell-side’s prediction of CVNA’s financial performance in the long term will come true, if the company can scale up and optimize its SG&A (Selling, General and Administrative) expenses

In terms of expanding the company’s revenue base, Carvana is a leading player operating in a very fragmented market and this implies a substantial opportunity to realize market share gains driven by industry consolidation. CVNA describes itself as “the second largest used automotive retailer in the U.S.” in the company’s recent June 15, 2022 media release. In its fiscal 2021 10-K, Carvana cited industry data which indicates that no single dealer brand has more than 3% share of the US used vehicle market and that the combined market share of the 100 largest used car sellers in the country is only around 10%.

With respect to cost optimization, Carvana announced on May 10, 2022 that it will proceed with “a workforce reduction of approximately 2,500 employees primarily in operational groups.” CVNA also explained in the announcement that it has laid off workers with the aim of “restoring a better balance between its sales volumes and staffing levels and facilitate Carvana returning to efficient growth.” This is part of CVNA’s plans to achieve its target of reducing its SG&A per retail unit from $4,780 in FY 2021 to $3,000 in the medium term. CVNA’s SG&A expenses includes staff compensation, advertising, logistics and occupancy costs, and there is certainly room for CVNA to become leaner by cutting costs in different expense categories.

Is CVNA Stock A Buy, Sell, or Hold?

CVNA stock is a Hold. I have a positive view of Carvana’s long-term outlook with respect to market share gains and profitability improvement. But the used vehicle market shows signs of weakening, and this will have a negative impact on CVNA’s performance in the short term.