Carvana (CVNA, Financial), known for its online car buying and selling platform, has recently caught the attention of investors with its impressive stock performance. Following the release of its Q3 earnings report, Carvana's stock surged by 25%, reaching a record high of $259.39. This surge has prompted investors to weigh potential risks as the stock enters overbought territory, with analysts expressing cautious views on its valuation.
The Q3 report marked another record-breaking quarter for Carvana, with vehicle sales increasing by 34% and revenue climbing 32% to $3.66 billion, surpassing the projected $3.45 billion. The company reported earnings per share of $0.64, exceeding the estimated $0.17. Looking ahead, Carvana expects fourth-quarter sales growth to exceed 34% and anticipates adjusted EBITDA for the fiscal year 2024 to significantly surpass the $1 billion to $1.2 billion range, despite operating in a challenging automotive industry environment.
Carvana's infrastructure supports the sale of over 3 million retail vehicles annually, with strategic refurbishing locations closer to customers to improve unit economics by reducing transport costs. CEO Ernie Garcia mentioned that ongoing infrastructure investments would drive substantial growth beyond the current scale, emphasizing that their competitive moat is still developing.
Analysts from JPMorgan, Rajat Gupta and Ryan Brinkman, highlighted that the Q3 performance should be seen as pivotal, potentially alleviating concerns about Carvana's recent progress in unit economics, especially its competitive advantages. They noted that Carvana's 2023 debt restructuring positioned it as a more profitable and flexible company.
Carvana's ability to accelerate sales growth despite stable advertising spending indicates room for improvement. The company plans to increase advertising expenditure by $5 million to $10 million in the current quarter, a typically slow period for car sales. Jefferies analysts John Colantuoni and Brent Thill pointed out that Carvana's 30% sales growth, despite consistent advertising and inventory levels, highlights substantial market share growth potential.
Over the past six months, Carvana's stock has soared an astonishing 177%, compared to a 14% rise in the S&P 500 and just a 10% increase for its closest competitor, CarMax (KMX). However, Seeking Alpha analyst Dave Kranzler argues that Carvana's stock appears "wildly overvalued." He anticipates forthcoming defaults, significant debt restructuring postponing burdens for two years, and stricter underwriting standards by financing partners could erode Carvana's valuation.
Piper Sandler's Alexander Potter shares this sentiment, reiterating a neutral rating and cautioning that the current valuation offers limited upside potential. He added that historical beta values inaccurately reflect Carvana's true risk profile.
