Carvana’s (CVNA) online platform for buying and selling cars is popular for its seamless customer experience, and wide selection of vehicles.
As the used car industry shifts from offline to online, the used car retailer seems to be well-positioned to benefit. I am bullish on the stock. (See Carvana stock charts on TipRanks)
The Bulls’ Point of View
Used cars are selling like hot cates as a result of pent-up demand from last year, keeping the used car market in the spotlight. This, combined with strong traction in online shopping is fueling Carvana’s growth.
Carvana’s Q2 saw record gross profit and EBITDA margins, which prompted the company to confidently project robust gross profit growth throughout the rest of this year.
The company has 13 reconditioning centers with a capacity of 750,000 cars, and plans to expand it in the near future. This is likely to be a key growth driver. Moreover, its digital customer acquisition strategy, and other aspects of its vertically integrated model have successfully helped Carvana outperform the dealer industry over the past few years.
The Bears’ Concerns
Carvana’s selling, general, and administrative (SG&A) expenses have only escalated since its inception. SG&A costs have chronologically increased from $211.8 million in 2017, to $1.05 billion in 2020.
High capital expenditures and other expenses have kept the company from recording any positive free cash flow in the past few years, which in turn has not generated any dividend yet. The chances of Carvana taking up investor-friendly initiatives are slim in the foreseeable future.
Moreover, gross profit per unit is also slowing down due to the gradual decline in the price of used cars.
Recently, Needham analyst Chris Pierce noted, “We think it’s GPU cadence dynamics and concern around used car prices, positioning dynamics in the digital auto group, and hesitation from investors around COVID winners as they post uneven results.”
He also noted that since Carvana does not make any profit from selling cars, any volatility in the demand for auto loans will further damage the company’s profitability.
Pierce ultimately leaned towards a bullish stance, reiterating a Buy rating on Carvana, while increasing his price target to $421, from $400.
While this seems too ambitious for the bears, the analyst pointed out that he is “yet to see a slackening in demand.”
“To be bearish on Carvana we would have to see evidence of the shift to online slowing, a new leader emerging causing Carvana’s growth and profit trajectory to slow or a significant prolonged negative credit event hindering Carvana’s customers’ ability to repay auto loans,” he argued.
Pierce further believes that Carvana’s verticalized approach to sales should “lead to significant value creation over the next several years.”
The Wall Street consensus shares Pierce’s bullish stance on Carvana, with a Strong Buy rating, based on 13 Buys and four Holds. The average Carvana price target of $393.31 implies 20.2% upside potential from current levels.
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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.
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