Up 593% in a Year, Is It Time to Take Profits on This Growth Stock?

Valued at a market cap of $47.4 billion, Carvana (CVNA) operates an online platform where you can buy and sell used cars. CVNA is among the hottest stocks in the market, rising close to 600% over the last 52 weeks. Since the start of 2023, Carvana stock has risen by a monstrous 4,650%. 

Despite its market-thumping returns, CNVA stock still trades 39% below all-time highs, as it shed more than 90% during the bear market of 2022. 

Let’s see if owning the growth stock at its current valuation makes sense. 

Is Carvana Stock a Good Buy Right Now?

Like other growth stocks, Carvana was impacted by headwinds such as inflation and elevated interest rates in 2022. Its gross margins fell to 9.2% in 2022 from 15.1% in 2021. In the last 12 months, the company’s gross margins have improved to 20%, driving the stock price higher. Further, it has reported an operating margin of 5.5% in the past year, compared to a negative operating margin of 10.3% in 2022. 

Carvana's sales increased from $3.94 billion in 2019 to $12.8 billion in 2021 as demand for used cars gained significant momentum during the COVID-19 pandemic. However, its top line fell to $10.77 billion in 2023 before improving to $12.55 billion in the last 12 months. 

CVNA stock surged over 19% in a single trading session last Thursday following its Q3 results, where it reported revenue of $3.65 billion with adjusted earnings of $0.64 per share. Comparatively, Wall Street forecast sales at $3.45 billion with earnings per share of $0.25. 

Notably, Carvana forecast that its full-year 2024 adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) would be significantly higher than its previous target of between $1 billion and $1.2 billion. In 2023, it reported an adjusted EBITDA of $339 million. In Q3, it reported an adjusted EBITDA of $429 million, indicating a margin of 11.7%, compared to $148 million or 5.3% in the year-ago period. 

Moreover, Carvana said it expects retail vehicle sales in Q4 to increase compared to Q3. In the September quarter, Carvana sold 108,651 vehicles, and it anticipates ending 2024 on a high. 

A Focus on Debt Reduction

A key reason for Carvana’s stellar comeback is the company’s improving profit margins. However, it must still shore up its balance sheet and consistently meet debt obligations. Its long-term debt has increased from $668 million in 2019 to $5.8 billion in 2022. That said, Carvana has lowered this figure to $4.70 billion at the end of Q3 of 2024. 

Carvana’s interest expense totaled $668 million in the last four quarters. Comparatively, its free cash flow in this period was lower, at $534 million. In 2023, the company reported a free cash flow of $716 million, while its interest expenses stood at $632 million. It seems Carvana has been generating just enough cash to meet its interest liabilities since the start of 2023.  

What's Next for CVNA Stock?

Out of the 19 analysts covering CNVA stock, seven recommend “strong buy,” one recommends “moderate buy,” 10 recommend “hold,” and one recommends “strong sell,” for a “moderate buy” consensus. The average target price for CVNA stock is $199.06, a discount to the stock's current price.

Carvana grew its units of cars sold by 34% year over year in Q3, allowing it to increase sales by 32%. With car units sold expected to increase sequentially in the current quarter, Carvana is positioned to grow its revenue and margins in 2024 and beyond. 

Priced at 50x trailing free cash flow, CVNA might seem expensive. However, its improving profitability and strong growth rates make it a top investment option right now. 

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.