Bullish sentiment has taken over Wall Street, as evidenced by both the S&P 500 and Nasdaq Composite index being in record territory. Even some businesses that have been labeled as riskier are seeing their share prices soar.
That's especially true with Carvana (CVNA 8.79%). The online used car retail stock skyrocketed over 1,000% in 2023. It has continued its impressive run so far this year.
Before you buy the shares, which are still 77% below their peak price, here are three must-know facts about Carvana.
1. Improving the customer experience
Despite its wild ride in the past few years, Carvana deserves a ton of credit for what it has accomplished thus far. The founders saw a clear opportunity to improve upon the traditional brick-and-mortar dealership method, which is characterized by limited inventory selection, an aggressive salesperson, and opaque pricing.
Seeing how e-commerce was taking over the retail sector, the thinking for Carvana's founding centered on figuring out how to sell cars in a completely online format. Customers can browse a nationwide inventory of tens of thousands of cars, view detailed pictures, and access financing solutions all on the website. The entire process can literally take minutes. Carvana even offers free delivery with a seven-day trial. This makes buying a car an incredibly convenient and hassle-free experience.
It's no wonder the business has caught on in a remarkable way. There's a clear desire from consumers for what Carvana offers.
2. Focus on the financial position
Anyone who follows the company knows how much attention Carvana has gotten for its financial troubles. The debt burden has always been an issue, so much so that the stock's alarming drop from August 2021 to December 2022 was influenced by the fear that Carvana was about to enter bankruptcy.
To help alleviate the situation, management entered into a deal with creditors last year that lowered interest payments and extended maturities. This gave Carvana the breathing room it needed.
Even before that debt restructuring, the company had never achieved full-year profitability. It posted a net loss of $1.6 billion in 2022. But thanks to a gain on debt extinguishment, Carvana was able to report positive net income of $450 million in 2023. Given the one-time benefit, investors shouldn't expect consistent profits for a while still.
To its credit, though, Carvana has found $1.1 billion in annual cost savings that have at least made it a more efficient organization. And executives forecast adjusted earnings before interest, taxes, depreciation, and amortization to be higher this year. These are positive trends.
However, I still view this as a financially risky enterprise that will likely struggle in a recessionary period.
3. Staring at a massive market
If you zoomed out and viewed Carvana's numbers from a high level, you'd quickly realize the ridiculously impressive growth trajectory of this business. Carvana's retail unit sales of rouhgly 313,000 in 2023 were about 150-fold higher than they were just nine years ago. The company's digital-only offering is catching on with consumers.
Despite its growth, Carvana's 2023 volume represented just 0.9% of the 35.9 million total used cars sold in the U.S. The industry is fragmented and truly massive, giving this business a huge expansionary runway to further penetrate over time.
Investors can't ignore the competition, though. Not only are there brick-and-mortar dealerships to deal with, but other players with an online presence like Driveway, AutoNation, and CarMax all want a piece of the pie. Carvana certainly has its work cut out for it. And it will need to successfully balance growth investments with cost controls going forward.
Investors who are curious about Carvana now have some basic information to aid in their research process before deciding what to do with the stock. If you're someone who has conviction in the company's turnaround efforts and long-term prospects, then it makes sense to buy shares while they are still meaningfully below their all-time high.
On the other hand, if you agree that this remains a very risky situation, then it's best to be patient until management makes further improvements when it comes to achieving sustainable growth and getting to consistent profitability.
