Is Carvana a Good Stock to Buy for Long-Term Growth

Carvana is an online used car retailer that's been gaining traction in the market. They've managed to disrupt the traditional car-buying process by offering a seamless and convenient experience for customers.

Their business model is built around a unique approach to car sales, with a focus on online inventory and a no-haggle pricing strategy. This approach has helped them expand rapidly across the US.

Carvana's growth has been impressive, with a 30% increase in revenue over the past year.

Here's an interesting read: Brk Class B Stock Fund

Carvana has had an amazing run since its IPO in 2017, with revenues jumping around 16-fold between 2017 and 2024.

The company's end-to-end online business model has transformed traditional used-car sales in several ways, making it a top pick for growth investors with a Growth Style Score of A.

Carvana boasts an average earnings surprise of +107.3%, with three analysts revising their earnings estimate higher in the last 60 days for fiscal 2025.

Additional reading: Ford Class B Shares

The Zacks Consensus Estimate has increased $0.01 to $5.07 per share, indicating a strong growth potential for the company.

However, Carvana's high valuation might make the stock unattractive to buy at its current price of $220, especially considering its very weak profitability.

Needham, a financial services firm, has a Buy rating on Carvana and lifted its price target to $200 from $160 after earnings, indicating a potential upside of nearly 40% to current levels.

Analysts have had a tough time keeping up with Carvana's quick ascent, with the average analyst target price for CVNA stock being $125, which is about 20% below current levels.

Intriguing read: Potential Stock Splits 2024

Carvana's financial strength and health are crucial for growth investors, who focus on a company's future outlook. The Growth Style Score takes projected and historic earnings, sales, and cash flow into account to uncover stocks with long-term, sustainable growth.

Carvana's market cap is $55 billion, and its net debt is $4 billion, giving it an enterprise value of $59 billion today. This is a necessity when valuing heavily indebted companies.

See what others are reading: Goodness Growth Stock

The company aims to hit adjusted EBITDA margins of at least 8% over the long term, but smart investors know this is a nonsense metric. Net income is a better figure to measure with, and will likely be lower than adjusted EBITDA due to capital expense needs.

A 5% net income margin on Carvana's trailing $13.7 billion in revenue would equal $685 million in net income. This would give it a theoretical earnings ratio of 86 based on the current enterprise value.

Stocks with a Strong Buy rank, like those identified by the Zacks Rank, have produced an unmatched +23.75% average annual return since 1988. This is more than double the S&P 500's performance over the same time frame.

For more insights, see: How Many Stocks Are in Brk B

Carvana's financial performance has been a mixed bag, but it's shown signs of improvement in recent years. The company's revenue growth has been notable, with its top line growing at an average rate of 4.1% over the last 3 years.

Carvana's revenue growth has outpaced the S&P 500 in recent years, with a 26.9% increase from $11 billion to $14 billion in the last 12 months. Its quarterly revenues grew 46.3% to $3.5 billion in the most recent quarter.

However, Carvana's profit margins are lower than most companies, with an operating margin of 7.2% and an OCF-to-Sales ratio of 6.7%. This is significantly lower than the S&P 500's operating margin of 13.0% and OCF-to-Sales ratio of 15.7%.

Recommended read: S&p P/e Ratio Current

Carvana's financial stability is a story of recovery and resilience. The company's aggressive investment in growth efforts led to a huge overinvestment in expenses and capital expenditures, resulting in negative free cash flow of $3 billion on an annualized basis in 2022.

Carvana has made significant efforts to pull itself out of its financial hole, including laying off workers, slashing its marketing budget, and sharply reducing its capital expenditures.

By 2023, this spending discipline paid off, bringing the company back to a cash-flow-positive state. Capital expenditures remain low, at just $91 million over the last 12 months compared to over $600 million annually at the height of its spending spree.

For another approach, see: Tobacco Company Stock Code

Carvana's balance sheet looks strong, with a debt figure of $6.0 billion and a market capitalization of $29 billion. This implies a strong debt-to-equity ratio of 19.9%, lower than the S&P 500's ratio of 19.0%.

Cash makes up a significant portion of Carvana's total assets, with $2.2 billion in cash and cash equivalents out of $8.5 billion in total assets. This yields a strong cash-to-assets ratio of 25.7%, higher than the S&P 500's ratio of 14.8%.

Despite its financial struggles in the past, Carvana's stock has been one of the best performers in 2024, up over 200%.

Readers also liked: Total Energies Stock

Carvana's top line has grown at an average rate of 4.1% over the last 3 years, which is lower than the S&P 500's increase of 6.3% over the same time frame.

Carvana's revenues have grown significantly in the last 12 months, reaching $14 Bil, a 26.9% increase from $11 Bil, outpacing the S&P 500's growth of 5.2%.

In the most recent quarter, Carvana's quarterly revenues grew 46.3% to $3.5 Bil, a notable improvement from $2.4 Bil a year ago, beating the S&P 500's quarterly growth of 5.0%.

Carvana's profit margins are lower than most companies in the Trefis coverage universe, with an Operating Margin of 7.2% over the last four quarters.

This is significantly lower than the S&P 500's average Operating Margin of 13.0%. To put this into perspective, Carvana's Operating Income over the last four quarters was $990 Mil.

Carvana's Operating Cash Flow (OCF) over this period was $918 Mil, which points to a poor OCF-to-Sales Ratio of 6.7%. This is also lower than the S&P 500's average OCF-to-Sales Ratio of 15.7%.

Readers also liked: Stla Stock Average Brokerage Recommendations

Carvana's stock performance is impressive, with a 9.11% increase over the past week, outpacing the 1.42% growth of the Zacks Internet - Commerce industry.

The company's shares have also risen 74.53% over the past quarter and 192.12% in the last year, far exceeding the S&P 500's 23.56% and 13.28% gains, respectively.

However, it's worth noting that Carvana's valuation looks expensive compared to the broader market, with a price-to-sales ratio of 2.2, a price-to-operating income ratio of 30.7, and a price-to-earnings ratio of 33.1, all higher than the S&P 500's ratios of 3.2, 24.3, and 24.3, respectively.

To beat the market, it's essential to understand the momentum behind a stock. Looking at a stock's short-term price activity is a great way to gauge if it has momentum, since this can reflect both the current interest in a stock and if buyers or sellers have the upper hand at the moment.

Shares of Carvana Co. (CVNA) are up 9.11% over the past week, outperforming the Zacks Internet - Commerce industry's 1.42% gain over the same time period.

Considering longer term price metrics, like performance over the last three months or year, can be advantageous. Over the past quarter, shares of Carvana have risen 74.53%, and are up 192.12% in the last year.

A rising stock with above average volume is generally a bullish sign, and Carvana is averaging 3,378,263 shares for the last 20 days, a significant indicator of investor interest.

On a similar theme: Nkla Short Interest

Carvana's valuation looks expensive compared to the broader market. CVNA stock has a price-to-sales (P/S) ratio of 2.2, which is lower than the S&P 500's 3.2.

Readers also liked: 2 Penny Stocks to Buy

However, the company's price-to-operating income (P/EBIT) ratio of 30.7 is higher than the S&P 500's 24.3, indicating that investors are paying more for Carvana's profits.

Carvana's price-to-earnings (P/E) ratio of 33.1 is also higher than the S&P 500's 24.3, suggesting that investors are willing to pay more for the company's earnings.

These valuation metrics suggest that Carvana stock may be overvalued compared to the broader market.

Explore further: Will Pltr Beat Earnings

Carvana's stock has been on a remarkable run, with revenues jumping 16-fold between 2017 and 2024. This growth can be attributed to the company's end-to-end online business model that covers every aspect of used-car retailing.

The Zacks Rank has CVNA as a #3 (Hold) stock, with a VGM Score of B. This suggests that the stock may not be the best investment option, but it's not a bad one either.

Carvana has a Growth Style Score of A, forecasting year-over-year earnings growth of 218.9% for the current fiscal year. This is a significant growth rate that could make the stock attractive to growth investors.

You might like: Nvidia Corporation 5-10 Year Stock

However, Carvana's profitability is very weak, which is a major concern. This could lead to a decline in the stock's value if the company's financials don't improve.

The average analyst target price for CVNA stock is $125, which is about 20% below current levels. This suggests that many analysts are bearish on the stock, which could be a warning sign for investors.

Despite the concerns, some analysts, like Needham, are bullish on Carvana. They have a Buy rating on the stock and a price target of $200, which represents implied upside of nearly 40% to current levels.