After falling from grace, Carvana (CVNA 4.04%) is back to rewarding its shareholders. The stock has climbed a remarkable 615% so far this year, as of Oct. 12. Perhaps investors are now becoming very optimistic about the used car retailer's long-term prospects.
Carvana is undoubtedly still a very high-risk company to own, but should the business successfully navigate its financial woes and return to its historical trajectory, this growth stock has the potential to rise tenfold in the next decade. Here's why.
Disrupting an outdated industry
The way used cars have typically been sold in this country is a poor experience for consumers. They visit a brick-and-mortar dealership, choose from what is likely a limited inventory of cars, and haggle with a salesperson who might not always be transparent. Even worse, the entire process can take hours. Carvana saw an opportunity to apply technology, data, and e-commerce capabilities to disrupt the industry and it has huge potential because it provides a much better consumer experience, with increased convenience, a nationwide inventory of vehicles, clear pricing, free delivery, and a seven-day return policy.
Additionally, the domestic used car market is truly massive, with 2021 unit sales greater than 40 million and transaction value at over $1 trillion. The top 100 used car dealers in the U.S. control just 11% of the market, so it's an extremely fragmented industry.
In 2022, Carvana sold 412,000 cars and generated revenue of $13.6 billion, so it's still just a tiny fish in a massive pond, even though its growth in the past several years has been nothing short of spectacular. While macro-related headwinds have slowed gains, if the business can get close to its past growth, investors have a lot to get excited about.
NYSE: CVNA
Key Data Points
On the path the profitability
Developing a nationwide logistics footprint -- consisting of inspection and reconditioning centers, car vending machines, and delivery vehicles and personnel -- is not cheap. And Carvana bears have been able to make an easy argument wondering when, if ever, this company will reach profitability. The management team will tell you that after a certain level of scale is reached, operating leverage will kick in. If this happens, net income could skyrocket, leading to huge gains for shareholders.
Since the second quarter of 2022, executives have found ways to reduce annualized selling, general, and administrative expenses by $1.1 billion. The company's net loss went from $430 million in the year-ago period to $105 million in the most recent quarter (ended June 30). And thanks to a recent debt restructuring, Carvana will save $455 million in each of the next two years on interest payments.
Gross profit per unit sold is a critical metric to watch. This figure nearly doubled in the past year. Besides non-recurring benefits, the leadership team called out "fundamental improvements" in the business as reasons for the big advance.
These are all positive indicators that Carvana is at least heading in the right direction. Management is firmly committed to achieving profitability.
Valuation provides added upside
Even after soaring so far in 2023, Carvana's stock trades at a price-to-sales ratio of only 0.3. That's well below its historical average of 1.1 and near the cheapest shares have ever been. As of this writing, the stock is 90% below its peak price from August 2021. This situation tells me that there's still a lot of pessimism surrounding this company, as there should be. It's difficult to have any clarity as to how things will play out over the next 12 months, let alone the next decade.
However, a cheap valuation results in much greater upside. And any indication of Carvana making progress toward its growth and profit targets will likely be rewarded by investors because expectations still look to be low.
To be clear, Carvana is a risky play for anyone's portfolio, but there is a possibility, no matter how small, that shares can soar tenfold in the next 10 years.
