Shares of online auto-dealer Carvana (CVNA -0.56%) have seen parabolic returns this year. As of this writing, the company's shares have risen over 1,000% year to date.
Some of this gain was fueled by a big jump in the share price this week as the company reported better-than-expected revenue and significant positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company also impressed investors with an agreement with noteholders to restructure its debt in a way that will significantly reduce its interest expense over the next two years.
While Carvana's astronomical returns have undoubtedly been exciting for investors, they shouldn't get too attached to the stock. Its valuation, at this stage, is extraordinarily difficult to justify. Shareholders may want to take advantage of the stock's run-up and sell, moving their capital to a less speculative investment.
NYSE: CVNA
Key Data Points
A nonsensical valuation
Good luck trying to justify Carvana's $10 billion market capitalization. You'll need it. When analyzing the company's second-quarter report, you'll find that Carvana lost $105 million on revenue of approximately $3 billion. For the six months ended June 30, Carvana's loss was $391 million on net sales of about $5.6 billion.
Moving over to Carvana's balance sheet, you'll find $677 million of cash and restricted cash and more than $6.5 billion in long-term debt.
Its sales trend is worrisome but can be forgiven. Retail units sold were down 35% year over year in Q2. But this period was up against an incredibly tough year-ago comparison during a used-car sales frenzy as new-vehicle supply was constrained.
The problem, however, is that some of the slowdown is self-inflicted. Carvana has put less of a priority on growth to focus on improving unit economics. But this begs the question: How well will the company keep costs under control when it starts pressing the accelerator on growth again?
With some due diligence, investors can likely arrive at some sort of valuation estimate for the stock. But it's unlikely that a reasonable, mathematical, and objective analysis can conjure up a valuation of $10 billion or greater.
Don't forget about CarMax
There's also another looming problem for Carvana investors: How can they justify the stock's $10 billion market capitalization when its larger, profitable competitor's market cap is less than 40% higher at $13.8 billion?
CarMax (KMX -0.64%), which sells cars both online and in person, is a far more efficient operation. In its fiscal year ended Feb. 28, 2023, CarMax generated a $485 million profit on $31.1 billion in revenue. Though not a perfect comparison since Carvana operates on a different fiscal year, Carvana's calendar 2022 net loss was about $1.6 billion on revenue of $13.6 billion.
By most metrics, CarMax should arguably deserve a market cap 2x to 3x greater than Carvana's. Betting on Carvana at this level, when investors can buy CarMax at just 29 times earnings, doesn't make much sense.
While investors should always do their own due diligence, it's probably wise to consider selling shares of Carvana after their recent surge. Shareholders should ask themselves whether or not they can sensibly justify the stock's current valuation.
