To say that Carvana (NYSE: CVNA) shareholders have had a bumpy ride would be putting it lightly. The online used car retailer saw its shares skyrocket in the first four years after it hit the public markets in 2017, with the market cap reaching $31 billion in August 2021. But macroeconomic headwinds that started in 2022 crushed the business, and the automotive retail stock cratered. Through 2022 and 2023, the stock dropped 77%,
There's a renewed sense of hope, though. Carvana stock soared 800% from Feb. 27, 2023, to Feb. 27, 2024, driven by upbeat financial results.
Is it time to buy this stock?
Looking at the latest numbers
On Feb. 22, Carvana reported revenue and unit volume of $2.4 billion (down 15% year over year) and 76,000 (down 13%) during the last three months of 2023. Both figures missed Wall Street estimates. And the company's volume has now dipped in two consecutive years.
But Carvana impressed shareholders in another important area. The business has focused relentlessly on cutting costs, with fulll-year selling, general, and administrative expenses declining 34% in 2023. "Right-sizing" operations has been a focal point for the management team.
Efficiencies helped Carvana hit a financial milestone. It posted positive net income of $150 million in 2023, giving bullish investors plenty to cheer about. This was after the company reported a net loss of $2.9 billion in 2022.
Looking ahead, management expects retail unit volume to be higher in Q1 and for the full year of 2024 when compared to the same periods last year. Investors got excited.
Staring at a huge market
Carvana's goal to completely disrupt the way people buy and sell cars hasn't changed. Despite its volatile financial results in the past couple of years, the company's addressable market remains massive. In the U.S., 36 million used cars were sold last year. The industry is also extremely fragmented.
A business that is able to improve the user experience can win over customers. With its emphasis on providing shoppers with a fast, convenient, and transparent way to buy and sell vehicles, Carvana stands out in this regard.
At the same time, the company has historically invested aggressively to build out its logistics footprint, and this hasn't come cheaply, particularly when trying to create a vertically integrated organization. But understanding the expansionary runway, the leadership team wants to develop scale advantages, which justify the huge capital outlays.
It's worth pointing out that at the end of 2023, Carvana was available in 316 markets across the country, the exact same number as 12 months prior. So in order for the leadership team to get the company's financial position in a better place, it's completely halted growth plans. Of course, this is not the right strategy for the business over the long term, as shareholders will start to demand that progress toward expansion is being made.
It will be important for investors to pay close attention to how executives strike the right balance between growth and profitability in the years ahead.
High risk, high reward
As of this writing, Carvana shares sit 78% below their all-time high from about 2 1/2 years ago. They trade at a price-to-sales ratio of 1.2, which is slightly above the historical average. This is after the stock has come roaring back.
However, don't rush to scoop up the shares just yet as Carvana remains an extremely high-risk investment opportunity.
To its credit, the company is making notable progress bringing costs under control, but growth has completely stalled. This points to how sensitive Carvana is to macro factors. The current long-term debt burden of $5.5 billion also doesn't help the situation. Investors always have to worry what direction the economy is headed in. If there's a recession, the company would unquestionably be in trouble.
This stock has sizable upside, but the downside is too hard to ignore. And that's why I'm not a buyer today.
Should you invest $1,000 in Carvana right now?
Before you buy stock in Carvana, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Carvana wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of February 26, 2024
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
