A little over a year ago, it appeared like Carvana (CVNA +2.87%) was on the verge of bankruptcy. But ongoing improvements by the management team to right-size operations and fix the financial situation have seemingly done enough to satisfy investors. Shares have skyrocketed 942% just in the last 12 months (as of March 19).
But as of this writing, Carvana remains 78% below its all-time high. Can this used-car e-commerce stock continue to drive higher and rise 25% from today's level, reaching $100 by the end of 2024? Here's how investors should view the situation.
Ongoing business momentum
Higher interest rates and softer conditions in the used-car market dealt a serious blow to Carvana starting in 2022. The negative trends continued last year. The business reported a 21% decline in revenue and a 24% drop in cars sold. Carvana also pumped the brakes on its growth ambitions, entering no new markets last year.
That clearly didn't prevent investors from bidding up the stock price. I believe what boosted sentiment was the fact that Carvana moved away from being on the cusp of insolvency to getting in better financial shape. In July of last year, management entered into a debt restructuring deal with creditors that lowered the principal amount and extended the maturity dates of its loans. This has worked wonders in bolstering investors' confidence in the stock.
Management also emphasized major cost cuts that have resulted in $1.1 billion of expenses being reduced on an annualized basis. This helped Carvana generate $150 million in net income last year, a surprise to many. That was the company's first-ever annual profit.
Even after the stock's huge gain, it's still cheap, trading at a price-to-sales multiple of 1.2. It's particularly inexpensive when compared to where it was at during most of 2020 and 2021. There is still a lot of work to be done to get to Carvana's former glory.
I think if the company continues to post better-than-expected financial results during the course of this year, with sales growth and positive earnings being reported, then there's a strong likelihood the stock will pass $100.
However, if the business disappoints investors, or there's general weakness in the stock market, shares could take a huge hit.
NYSE: CVNA
Key Data Points
The future is uncertain
Carvana appears to show no signs of slowing down. Even this year, the stock is up 51%. It's easy for investors who have been on the sidelines to want to jump in and ride the momentum.
Management expects retail units sold to rise in the current year compared to 2023. And executives forecast adjusted earnings before interest, taxes, depreciation, and amortization in the 12-month period to be higher than last year. That's encouraging, but these results are far from guaranteed.
I believe that it's impossible to predict what will happen in the near term, both for executive teams and for shareholders. For the latter group, there are so many factors that can impact investor sentiment and stock prices, like unexpected financial results or macro forces. No one knows ahead of time what is going to occur.
Based on the stock's incredible run-up over the past year, it would take a modest gain to get to $100 by the end of 2024. But I think it's just as likely that shareholders will also take some profits off the table, which would introduce selling pressure.
Investors shouldn't buy shares expecting Carvana to hit the $100 mark over the next nine months. But if you have conviction in this company's long-term prospects, then that's the only reason to scoop up the stock now. On the other hand, if you're still as bearish as ever about this business, it's best to stay away.
