After a tumultuous 2022 that saw the business teetering on the edge of bankruptcy, Carvana (CVNA 8.79%) has risen like a phoenix from the ashes. The stock is up a ridiculous 863% in 2023 through the end of July, a return any investor would love to see over a decade-long span, let alone seven months.
The used car e-commerce company has now reported two consecutive financial reports that indicate it's heading in the right direction. And investors are certainly taking notice of the progress, bidding up the share price in no time.
With the strong momentum surrounding the stock and the business, is it smart to buy, sell, or hold Carvana? Let's take a closer look.
What's going on with Carvana?
In the latest quarter (Q2 ended June 30), Carvana posted revenue of $3 billion, selling 77,000 cars during the three-month period. Both of these figures were down more than 20% on a year-over-year basis, indicative of the macroeconomic headwinds that the company has been facing.
Carvana also reported a net loss of $105 million, much smaller than the loss from Q2 2022. The company's top- and bottom-line numbers were both better than Wall Street expectations, partly contributing to the stock's huge surge following the earnings update.
One the most important metrics that management uses to measure the health of the company is gross profit per unit (GPU), which looks at the money the business makes on each car sold. Up 94% year over year, GPU was $6,520 in the latest quarter, a record for Carvana.
Besides the headline data points trending in the right direction, investors were excited about the news that Carvana was able to restructure its debt burden, reducing outstanding debt by more than $1.2 billion. Bondholders agreed to new terms, lowering Carvana's interest payments by over $430 million in each of the next two years. Because these new loans are actually backed by Carvana's physical assets, these creditors have some downside protection should the business not be able to pay back its obligations and default.
The good news is that this deal buys Carvana some more time to navigate a slowdown in the used car market, while shoring up its finances and hopefully getting closer to profitability. The bad news is that the deal highlights the dire situation the business is in from a financial perspective, even having to resort to such drastic measures for its survival.
The investing angle
There are certainly compelling reasons to buy Carvana stock. Its financial progress is notable, primarily as it relates to improving the balance sheet situation. While the business might be a long way from generating positive net income, it has so far handled macroeconomic headwinds, characterized mainly by higher interest rates, which started becoming a headwind in 2022. Things are looking better.
Carvana shares trade at a price-to-sales (P/S) multiple of 0.4 today, which is significantly cheaper than its average P/S ratio of 1.1. That leaves plenty of upside should the company continue penetrating the gargantuan $1 trillion domestic market for used vehicles. But don't forget that because there is still a lot of uncertainty around where Carvana will be even five years from now, this is still an extremely risky stock -- so if you're considering buying, maybe initiate a tiny position at first.
For those who already own the stock, the right course of action might depend on how long you've been a shareholder. On one hand, if you're someone who is sitting on a gain on your Carvana holding, perhaps it's a good idea to take the profits and sell. There's no doubt that owning Carvana hasn't been the easiest thing to do, so it could be smart to take advantage of the stock's impressive performance this year to exit the position.
The case to keep holding onto the stock also makes sense if you have greater conviction in Carvana's long-term prospects, especially after its latest financial update. If the business can keep growing units sold and revenue, while quickly gaining market share and controlling expenses, even shareholders who are currently in the red could end up realizing a profit on their holdings.
