Despite taking shareholders on a wild roller coaster ride since its initial public offering (IPO) in 2017, Carvana (CVNA -2.35%) has been a massive market outperformer. Since that time, it has generated a whopping 958% return, crushing the broader S&P 500 index. Strong revenue gains have been the key driver.
Investors who might have missed the boat are staring at a growth stock that is still 68% below its peak price. Perhaps sizable investment returns are on the horizon.
Can Carvana stock become a millionaire-maker over the long term?
Incredible momentum
Carvana's historical share gain is impressive in its own right, but it's even more incredible in recent times. Since the start of 2023, the stock has skyrocketed nearly 2,400%. This means that if you'd invested $41,000 in shares at the time, you'd be a millionaire today.
But it's worth pointing out that this rise can be attributed to changing investor sentiment. During this time, the stock's price-to-sales (P/S) ratio climbed by 6,000%, outpacing the increase in the stock price. The market went from being extremely bearish on the business to now being overly optimistic.
Carvana has given its shareholders reasons to be more cheerful. Executives reached a deal with creditors last year to extend loan maturities and reduce interest payments, giving the business some much-needed wiggle room.
And in the latest quarter (first-quarter 2024 ended March 31), Carvana reported revenue and unit growth of 17% and 16%, respectively. That's a welcome sign, as the company finally returned to expansion mode after posting six straight quarters of year-over-year sales declines.
Lots of uncertainty
It might seem tempting to think that we can simply extrapolate Carvana's past returns into the future. With that bullish outlook, it would take about 10 years to get to a million-dollar balance if you invest $100,000 today, assuming the stock repeated its return since the IPO. That would be a fantastic 26.6% annualized return.
It's not that straightforward, though. I think Carvana is a very risky investment to make. To its credit, it operates in a truly massive industry, of which management estimates it has 1% market share. By offering customers a better car-buying experience, particularly when compared to brick-and-mortar retailers, Carvana has serious potential.
But I believe Carvana's long-term picture is still a question mark. The business is extremely sensitive to macro and industry forces that are outside of its control, like interest rates and used car prices, respectively. Add in the fact that it has yet to produce consistent positive net income, and investors should lean toward a more cautious approach to the business.
If all things go right, and Carvana reports solid growth and improving profitability, the stock could be a huge winner over the next decade and beyond. But there's so much uncertainty as it relates to this favorable outcome. Competition remains fierce in the auto retailing sector.
Plus, Carvana is still in a troubled financial state. Even after its debt restructuring last year, there isn't much to be excited about. In the most recent quarter, Carvana spent $173 million on interest payments, which was greater than the $134 million it generated in operating income. How much longer can this go on until Carvana is forced to raise more external capital?
The current valuation also leaves a minimal margin of safety for prospective investors. Shares trade at a P/S ratio of 1.9 right now, a 73% premium to the historical average. This makes me wonder if the monster gains for Carvana investors are now a thing of the past.
If you were looking to score big on this stock, it's best to temper expectations. I'm not confident that this business can be a millionaire-maker.
