$Carvana Co.(CVNA)$ offers an online platform where customers can buy and sell used cars.
After flirting with bankruptcy in 2022 shares have recovered and are now up 188% over the past year but can the stock continue its powerful run?
At the latest price, Carvana now has a:
- Market cap: $63.61 billion
- Cash: $1.86 billion
-Debt and non-controlling interests: $5.9 billion
Full enterprise value: 80.2 billion
Over the last 12 months:
Revenue: 14.8 billion
Net income: 398 million
free cash flow: 949 million
So the company is valued at:
P/E Ratio: 104.17
EV/FCF: 85 times
That seems expensive for an auto dealership but the auto industry is a large market that is ripe for disruption. Carvana likes to position itself as an e-commerce business. The company buys vehicles reconditions them and then sells them on to customers online. They offer financing delivery returns and a head turning vending machine for customer pickups but the company also functions as a lenderoffering consumer auto loans which it then sells to investors like $Ally(ALLY)$ .
Right now things are going well. Revenues have grown 32% over the past year with net income and free cash flow turning positive. The 2022 cash crunch which saw the company cut costs and restructure its debt is now in the rear view mirror but not everyone is bullish on Carvana. Short sellers like Hindenberg Research and Jim Chanos are both flagging some serious concerns.
Shorts argue that Carvana isn't as profitable as it looks. Nearly all of Carvana's net income comes not from selling cars but the selling of loans to third parties many of which are subprime loans. These loans are packaged up to reduce risk but if they underperform banks like Ally Financial could stop buying them and that would cause Carvana's business model to unravel again. There are also concerns of loans being sold to undisclosed parties and the offloading of liabilities to auto retailer Drive Time, which is a private company owned by the CEO's father. A lack of transparency on these transactions makes it hard for investors to analyze Carvana'sunderwriting.
Meanwhile investors must remember that the auto industry is highly cyclical. A weak economy or rising loan delinquencies could push Carvana back into the red leading to a vicious cycle similar to the one seen in 2022 and all of this is happening while the company trades at a sky-high valuation with huge amounts of insider selling. Last week alone, insiders sold roughly $90 million worth of stock a pattern that occurred before the previous market drop.
In other words Carvana is not a straightforward investment despite the opportunity of disruption. The stock looks too richly valued given the modest net income, insider sales and the cyclical nature of the industry.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
