Carvana Soars 270% in a Year: Will the Bull Run Continue?

In the dynamic world of stock markets, there are only a few stories that capture investor attention like Carvana's CVNA. Over the past year, this used car e-retailer has witnessed a remarkable run on the bourses, with its stock surging more than 270%. This meteoric rise has not only outpaced the broader market but also left its peers — such as CarMax KMX, AutoNation AN and Sonic Automotive SAH — in the dust.  However, after such a significant rally, the question on every investor's mind is whether Carvana can sustain this momentum, or is it time to cash in on the gains?

1-Year Price Performance

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From the Brink of Bankruptcy to an Epic Turnaround

Carvana's journey over the past two years has been nothing short of dramatic. In 2022, the company was teetering on the edge of bankruptcy, plagued by high debt and operational inefficiencies. The situation was dire enough for many investors to write off the stock, which had plummeted to under $5 per share. However, Carvana's management executed a successful debt restructuring deal that effectively saved the company from collapse.

This restructuring was not just a financial step but part of a broader strategic shift. Carvana pivoted from an aggressive growth strategy to a focus on operational efficiency and cost-cutting. The company's three-step plan — aimed at driving positive adjusted EBITDA, achieving significant adjusted EBITDA per unit and eventually returning to growth — has been central to its revival. The results have been impressive, with Carvana's stock emerging as the top-performing auto stock of 2023 and rallying 176% so far this year.

Impressive Financial Metrics Driving the Rally

Positive Adjusted EBITDA Achievement: Carvana reached a critical milestone by achieving positive adjusted EBITDA in the second quarter of 2023. This marked a significant shift from its previous focus on rapid growth at the expense of profitability. The company's ongoing efforts to enhance operational efficiency across its business have been pivotal in this achievement. Carvana has undertaken several initiatives, including proprietary software development, logistics optimization, and the in-sourcing of third-party services, all of which have driven down costs and improved profitability.

Strong Retail Unit Growth: Despite economic headwinds such as high interest rates, Carvana has managed to grow its retail unit sales. In second quarter 2024 alone, the company increased its retail units by 33%. Looking ahead, Carvana expects this momentum to continue, forecasting a sequential increase in retail unit sales for the third quarter of 2024 and year-over-year growth for the full year. This growth is a testament to the company's ability to attract and retain customers in a competitive market.

Record Profit Margins: Carvana's focus on efficiency has also translated into record profit margins. In the second quarter of 2024, the company achieved a net income margin of 1.4% and an adjusted EBITDA margin of 10.4%, both of which are all-time records for the company. These margins reflect the success of Carvana's cost-cutting measures and the optimization of its business processes.

Image Source: Carvana

Improved Free Cash Flow: Carvana's ability to generate positive free cash flow is another encouraging sign for investors. In the first half of 2024, the company generated $415 million in free cash flow, slightly improving from $393 million in the same period the previous year. This positive cash flow further strengthens Carvana's financial position and provides a buffer against potential economic challenges.

The Road Ahead: Does This Rally Have Legs?

Carvana's incredible 270% surge over the past year is a testament to the company's successful turnaround and strategic execution. The shift from aggressive growth to operational efficiency has paid off, resulting in improved profitability, cash flow and a stronger financial position.

As of the second quarter of 2024, the company's total debt was $5.5 billion, down from over $6 billion at the end of 2023. While this reduction is a positive development, the debt load is still substantial. The good news for Carvana is that none of its long-term debt is due before 2028, providing the company with breathing room to continue its turnaround efforts.

CVNA's market position as the second-largest used automotive retailer in the United States, with only a 1% market share, highlights the significant growth potential ahead. The company's ability to expand its market share and tap into this potential will be critical in sustaining the stock's upward trajectory.

The Zacks Consensus Estimate for 2024 and 2025 revenues implies a year-over-year uptick of 19% each. The company is also witnessing positive earnings estimate revisions, signaling analysts' confidence in the stock.

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From a valuation standpoint, it's trading at a forward 12-month sales multiple of 2.1, way lower than its 5-year high. The company has a Value Score of B.

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Despite a significant recovery, Carvana's current share price is still well below its 2021 peak of $377. Since the stock is trading at a discount and given its improving fundamentals, one can accumulate more shares, as it has more room to grow.

CVNA currently carries a Zacks Rank #2 (Buy).

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