Shares of Carvana (CVNA 1.79%) plummeted 30.1% in January, according to data provided by S&P Global Market Intelligence. The e-commerce platform for buying and selling used cars was downgraded due to forward expectations for its end market and was hurt by the sharp decline in high-growth stocks last month.
There was no material financial news released by Carvana last month (although it did just announce it was doing a Super Bowl advertisement), with earnings coming out on Feb. 24. However, with so much news around the used car industry, investors have gotten skittish about the company's prospects. Used car prices have soared since the start of the pandemic, creating a good portion of the inflation we are currently seeing in the United States.
This has been good for Carvana's gross margins, but the lack of used car inventory across the nation has the potential to hurt Carvana's overall sales. This is likely why the stock is down 50% in the last six months, as investors believe that revenue growth may slow in the coming quarters unless used car inventories revert to normal. It should be noted while this does seem to be the speculation among the investment community, so far it hasn't materialized in Carvana's business. Last quarter, Carvana did $3.48 billion in sales, growing 125% year over year.
On top of the used car market, Carvana sold off along with the declines in high-growth stocks last month. The iShares Russell 1000 Growth ETF was down around 10% in January. This broad-based decline added more fuel to the decline in Carvana's stock price.
With Carvana's stock down 50% in the last six months to $150 a share, the stock now has a market cap of $26 billion. Over the last 12 months, the company has generated $10.9 billion in revenue and $1.66 billion in gross profit (it is not generating positive net income). That gives the stock a price-to-sales ratio (P/S) of 2.4 and a price-to-gross-profit ratio (P/GP) of 15.7.
The low P/S might make you think Carvana stock is inexpensive right now, but with such low gross margins that may be inflated along with used car prices, the stock is still not cheap even after this 50% drawdown.
This doesn't mean you should avoid buying Carvana stock, because if it can keep growing its top line in the triple digits, this high P/GP will likely come down quickly over the next few years. But the stock is not cheap, no matter where its share price was six months ago.