Investors appear to be optimistic these days, as evidenced by a stock market that's near record territory. This bullish sentiment has worked wonders for some businesses with a prime example being Carvana (CVNA +2.73%).
The online used-car retailer has enjoyed an incredible run since the beginning of last year, soaring over 2,600%. It's even up 121% just this year. Is it time to ride the momentum and buy Carvana shares today?
Strong demand
One key factor that has propelled Carvana stock to new heights has been a string of solid financial results. The company just reported numbers for the first quarter.
Revenue was up 17% year over year to $3.1 billion, beating Wall Street's estimates, thanks to a 16% increase to retail unit volumes. These numbers are definitely encouraging, but it's important to remember Carvana was really struggling in the year-ago quarter, so the comparisons right now are easy.
Nonetheless, there's reason to be optimistic. Management expects unit sales to rise sequentially in Q2. They cited strong customer demand as a contributor to Carvana's rising market share.
Zooming out, you'll see just how huge Carvana's long-term opportunity is. Despite the company's monumental growth in the past decade, executives say the business only commands 1% of industrywide sales. In theory, Carvana's focus on providing a better customer experience should lead to steady growth well into the future.
NYSE: CVNA
Key Data Points
Tuning up the finances
Carvana shares have also been helped by the company's improving financial position. There were some serious concerns a couple years ago the business was inevitably heading toward bankruptcy. But the leadership team restructured its debt in July 2023, helping to ease those concerns for the time being.
In addition to solid demand trends, Carvana is starting to report positive earnings, something I'm sure the bears never thought would happen. The business raked in $150 million in net income last year, followed by $49 million in the latest quarter.
For what it's worth, the company posted adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $235 million in Q1, which was a record. Executives have focused on driving operational efficiencies. Although revenue increased year over year, selling, general, and administrative expenses declined, helping boost the bottom line.
However, there are some caveats investors can't ignore. For starters, last year's net income benefited from an $878 million gain on the reduction of its debt. Absent this, the business would've been in the red. And last quarter, Carvana benefited from a fair value adjustment on warrants it owns in auto insurance company Root. Again, without this gain, the business would've posted a net loss.
Still a risky business
There's no denying Carvana's business is in much better shape today than it was this time last year. The leadership team is fully focused on registering healthy growth while at the same time prioritizing attempts to improve profitability. Investors clearly approve of this revamped strategy.
However, Carvana stock is still extremely risky. A lack of consistent profits from core operations is something that worries me. Plus, its debt hasn't gone away with a current balance of $6 billion. In Q1, the company paid more in interest than it generated in operating income, which is a troubling sign.
The stock is trading at a price-to-sales multiple of 2 as of this writing, significantly above its historical average of 1.1. As tempting as it may be to hop on Carvana's bandwagon, investors should avoid buying the stock right now.
