Carvana (CVNA 1.03%) has been using excessive after a blockbuster first quarter that noticed the net used-car retailer hit file highs throughout nearly each key metric.
Traders who purchased in when Carvana was a single-digit inventory throughout a really rocky 2022 are sitting on spectacular positive aspects now, with the share value up 1,000% over the previous three years. The inventory has surged 183% over the previous yr, and currently it has been inside placing distance of its all-time highs.
After such a large run, is it too late to park this e-commerce upstart in your portfolio? Let’s kick the tires on Carvana.
Big merchandising machines are one place to select up a automobile bought from it. Picture supply: Carvana.
A powerful turnaround
From the beginning, retail items (automobiles) offered has been Carvana’s most essential metric. In 2017 — its first yr as a public firm — Carvana offered 44,252 retail items, greater than double its whole from the earlier yr. That quantity peaked in 2021 at 425,237 items offered, proper earlier than issues took a scary flip.
After eight years of hypergrowth and regular margin enchancment, Carvana bumped into an ideal storm in 2022. A number of rate of interest hikes, cussed inflation, and record-high automobile costs slammed the brakes on used-car gross sales. In the meantime, Carvana had overextended itself on the worst doable time, finalizing its $2.2 billion acquisition of ADESA’s U.S. brick-and-mortar public sale enterprise in Might 2022 — simply because the market was stalling.
For full-year 2022, Carvana posted a web lack of $2.9 billion, whereas gross revenue per unit — its second most essential metric — dropped from $4,537 to $3,022. The inventory plunged 98% in 2022.
Heading into 2023, Carvana was holding extra stock and $6.6 billion in long-term debt. The inventory had plummeted under $10 a share, and chapter rumors have been swirling.
In a letter to shareholders, Carvana CEO Ernie Garcia stated 2023 can be “a key yr in our story.” He was proper. The corporate restructured its debt, rightsized its operations, and reduce $1.1 billion in annualized promoting, basic, and administrative bills. Now, in mid-2025, the corporate is on the intersection of development and profitability.
Hitting on all cylinders
As I famous earlier, Carvana’s first quarter of 2025 was a magnificence. The corporate generated $4.2 billion in first-quarter income, a 38% enhance from the year-ago interval, on gross sales of 133,898 retail items, a 46% enhance. Each have been quarterly information.
On the underside line, the corporate greater than doubled web earnings and adjusted earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) to $373 million and $488 million, respectively. In comparison with its earlier quarterly excessive for retail items offered (Q2 2022) Carvana offered 14% extra automobiles with 30% much less stock, 45% much less promoting spend, and 16% fewer staff. Doing extra with much less is an efficient factor.
The highest- and bottom-line outcomes prompted Garcia to unveil Carvana’s subsequent massive objective: promoting 3 million automobiles per yr at an adjusted EBITDA margin of 13.5% inside 5 to 10 years.
Dreaming too massive?
Attending to its objective of promoting 3 million automobiles in a yr would take a compound annual development price (CAGR) of 20% to 40%, in response to the corporate. Traders salivate over this type of development. However is it life like?
As Carvana provides inspection, reconditioning, and achievement capabilities to its ADESA amenities, the corporate says it’ll have the infrastructure to help gross sales of as much as 3 million automobiles.
The expansion runway is definitely there. Carvana estimates that it instructions simply 1% of a $1.2 trillion used-car market in the USA — a small slice of an unlimited whole addressable market. And Carvana is nicely positioned for development, with a presence in additional than 300 markets and with 81% of the U.S. inhabitants inside its supply vary.
Whereas the true property is in place, Carvana might want to ramp up headcount to help its bold development plans, and it is already began doing so, asserting plans in April for an public sale and reconditioning “megasite” integration in Phoenix that it expects will create roughly 200 jobs. Though Carvana’s labor effectivity has improved dramatically over the previous few years, I fear when a CEO declares that “we plan to prioritize development over margin,” which Garcia did in his Q1 shareholder letter. And I’ve to imagine that Carvana might want to aggressively ramp up its advertising and marketing spend to realize the form of annual gross sales development that it is eyeing. Traders might want to watch how the numbers play out.
And remember that Carvana nonetheless had $5.3 billion in long-term debt on the books, as of Q1 2025. Carvana has had some success in rejiggering its debt up to now, nevertheless it appears like the corporate is kicking the can down the street and this might weigh on the corporate.
Investor predict rather a lot
Whereas the debt load bears watching, my greatest problem with Carvana is the valuation. At a price-to-earnings (P/E) ratio of 112, Carvana trades at a hefty premium to friends comparable to CarMax, which has a P/E of 21 trailing 12-month numbers.
CVNA PE Ratio knowledge by YCharts
After a pleasant string of earnings beats — topping estimates — the common analyst estimate for Carvana’s 2025 earnings per share (EPS) is $4.85, which might characterize a 206% enhance over the 2024 quantity. With sky-high expectations, it looks as if Carvana’s inventory is priced for perfection.
For my part, Carvana’s inventory is at an inflection level. To justify its lofty valuation, the corporate must show it might stability continued development and operational effectivity. Whereas Carvana has proven it might do extra with much less, sustaining margin stability whereas scaling to three million automobiles per yr looks as if a tall order.
If Carvana can hit its bold development targets with out dropping its monetary self-discipline, the upside may very well be substantial. However at this valuation, even one unsuitable flip may take the air out of the rally.
