Carvana Stock Forecast - Financhill

Carvana Stock Forecast

Carvana Stock Forecast: The world is facing the wake of a global pandemic. While it might seem like certain industries are flourishing, you’d be forgiven for thinking the auto industry isn’t. But where does that leave such companies as Carvana? What about its stock?

Carvana is a bridge over the uneasy waters of e-commerce and used vehicles – two seemingly very different industries. But – are they really that different? Maybe – especially in the midst of COVID-19 – Carvana is just what consumers need right now.

In fact, Carvana could even be the future of vehicle shopping. Does this mean those investing in Carvana actually have some pretty good foresight? Maybe. At the very least, Carvana stock is worth considering.

Carvana Revolutionized Car Sales

Carvana revolutionized the used car retail model. Just fill out the paperwork, choose your financing option, and pick out a car – all online.

And there are over 10,000 used vehicles to choose from, most of which have low mileage. The company also performs a 150-point inspection on all vehicles it accepts and each one comes with a Carfax history report included for free.

Pricing isn’t negotiable – but most are pretty in step with the Kelley Blue Book for used vehicles in great condition. Also, depending where you’re located, you may even have the option of trading in your current wheels.

Surprisingly, Carvana doesn’t perform credit checks on buyers. The only stipulations Carvana has are that you have $10,000 in annual income and that you have no current bankruptcies.

That said, while the company doesn’t do a credit check, it does perform a soft pull to pre-qualify you for financing. You don’t have to use Carvana’s financing option, though – you can also pay cash or use your own lending institution.

Is Carvana Stock A Buy?

Like many companies currently wading through the COVID-19 waters, stockholders of Carvana experienced some rough rapids late in February and early throughout March as share prices plunged from more than $100 to $30 per share.

But this was a knee-jerk reaction to the state of the overall market. Shareholders who resisted the urge to panic have recovered much of their loss already. In fact, clear-headed investors appreciate Carvana’s model – they saw no reason to dump shares.

Auto sales for the company followed much the same trajectory – March saw a sharp drop of about 30% compared to March 2019 – but have since recovered and improved.

From mid-April to the present, Carvana’s auto sales have jumped to around 30% higher than last year’s sales at this time.

Investors who see glasses half empty might only look at factors like the 30% drop in auto sales – but that’s clearly the past. Carvana is progressing nicely and recovery is in full swing.

Risks of Investing In Carvana

Carvana’s ecommerce auto sales platform has seen a good run these last few years. In fact, their revenues more than quadrupled from 2017 to 2019. That said, Carvana is still a young company.

Certainly, this kind of growth could continue for another five to 10 years but that doesn’t mean that this stock doesn’t pose at least some risk – all stocks pose risk.

Even with all this positivity, one of the most important risks associated with this stock is its continued losses.

While revenues quadrupled from 2017 to 2019, the company’s annual net losses doubled during this same span from $164 million to over $360 million. But it isn’t as bad as it sounds, really – the net loss was due to Carvana’s steady investments to continuously expand their market share.

As an early stage company growing fast, the market will often give it the benefit of the doubt. The runway is long for the company to break even and eventually turn profits.

In fact, the company shows signs of this even now. Gross profit margin (GPM) rose from a dismal 5.3% in 2016 to nearly 13% in 2019. Their net loss margin (NLM) declined from nearly 30% to just under 17% over the same span.

Carvana stock is one to watch and consider. Since its initial public offering in 2017, its stock has skyrocketed by over 100% every year. Its current valuation stands at 1.75 times its sales. In comparison, one of its closest competitors, Carmax, currently trades below a valuation of 1 times its respective sales.

Will Carvana Competitors Beat It?

Unlike some newer companies that often have little to no competition in their industry, Carvana is playing in the big leagues with major competition, such as dealerships CarMax and AutoNation, and other online vehicles sales companies, such as Vroom.

Add to that all the independent dealerships in the United States and you can see Carvana’s got some competing to do.

A lot of these companies have been around much longer than Carvana, have better resources, greater financial stability, and more knowledge of the industry as a whole. These competitors could pose a threat to the long-term survival of Carvana.

But Carvana’s online model has a few advantages – for one thing, Carvana has a strong footing in small markets where their competition has no presence. Many of these markets are too small for the bigger players to justify. Not to mention, the used car landscape in the United States is massive and has plenty of room for several players.

Carvana Stock Forecast: The Bottom Line

When you compare Carvana’s stock to other ecommerce, high-growth stocks, its valuation is reasonable. It’s proven its disruptive business model works and there’s a large market wide open – used car sales in the United States totals about $710 billion every year.

They’re also gaining profitability. If they beat their revenue projections again this year, Carvana stock could even outperform the S&P 500.

At the time of publication, Carvana stock is a buy, but always invest responsibly.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.