What happened
Shares of Carvana (CVNA -0.18%) were up 6.8% as of 11:31 a.m. ET on Wednesday. The move follows many growth stocks that were moving higher ahead of the Federal Reserve's decision on interest rates.
The stock has fallen 91% from its lofty highs in 2021. Rising interest rates have been a major headwind to used vehicle sales lately, which has put the brakes on the robust revenue growth Carvana experienced through 2021, but investors are looking past that to a possible end to the headwinds in the coming months.
So what
The Federal Reserve is expected to raise the federal funds rate by 0.75 percentage points. Higher inflation and interest rates are making it more expensive to finance used vehicles, which have soared in price over the last few years. But the recent slowing demand for used cars has hurt Carvana's momentum.
However, a lot of the economic headwinds might be priced into the stock. Investors have had time to process the latest trends in the business, in which revenue decelerated from a 56% year-over-year increase in the first quarter to 16% in the second quarter. Management believes the economic headwinds, such as supply chain problems and higher inflation, are temporary and will eventually reverse course. Meanwhile, the company is pivoting its focus to boosting profits.
CVNA Revenue (Quarterly) data by YCharts
Now what
Fed day can bring about wild swings in the market, so investors should brace for volatility. Looking ahead to next year, management is holding to its outlook for improving profitability.
Management is still targeting higher gross profit per unit of at least $4,000 by fiscal 2023. That should translate to improving earnings per share. The consensus analyst estimate has Carvana narrowing its losses from $8.25 per share in 2022 to $4.87 in 2023. If the company can deliver on that promise, it could reward patient shareholders with a higher stock price.
