What happened

Shares of used-car e-commerce company Carvana (CVNA -2.16%) dropped on Thursday following a downgrade from an analyst. Exane BNP Paribas analyst Chris Bottiglieri is now "neutral" on the stock, whereas he had previously believed it would outperform the average returns for the S&P 500. As a result, Carvana stock was down about 9% as of 10:30 a.m. ET.

So what

It's not surprising that an analyst would downgrade Carvana stock right now. It's up more than 600% year to date. That's better than any other stock with a market capitalization of at least $300 million, according to FinViz.

In the second quarter of 2023, Carvana's revenue dropped 24% year over year. And the company had a quarterly net loss of over $100 million. This was greatly improved from the prior-year period but is still substantial nonetheless.

Falling revenue and ongoing losses pushed Carvana stock to an incredibly cheap valuation in early 2023, as the chart below shows. At one point, it traded with a price-to-sales ratio of less than 0.03, indicating the market questioned whether it could survive.

CVNA PS Ratio Chart

CVNA PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.

This positioned Carvana's stock to bounce back if it survived. And it is indeed still surviving, allowing for its incredible 600% year-to-date gain. For this reason, it makes sense that Bottiglieri would now downgrade his outlook, given its already incredible run-up.

Now what

The good thing for Carvana is that used cars are always in demand, and prices are still historically high. And the company was able to renegotiate some of its debt, giving it a tad more breathing room in the near term. That said, investors must remain cautious as Carvana has a long way to go to accomplish its mission of being "the largest and most profitable automotive retailer" in the world.

Carvana will report financial results for the third quarter of 2023 on Nov. 2.