Carvana Co. (CVNA) has been one of the top-performing retail stocks in 2024, soaring over 230% as of September 24th. This incredible run, which began in late 2023, has seen the stock climb by over 317%. Carvana is known for its innovative “vending machine” approach to car buying, disrupting the traditional used car market.
In the past two quarters, Carvana has returned to growth, with unit sales outpacing revenue. This suggests strong consumer demand, albeit potentially at lower price points. With lower interest rates expected, many believe the sky’s the limit for CVNA stock. However, not all analysts share this optimism, with some arguing that all the growth has already been factored into the stock price.
MarketBeat’s consensus price target for CVNA stock stands at $153.88, indicating a potential 10.4% pullback. Nevertheless, three analysts recently reiterated or even increased their price targets for CVNA, with the highest reaching $200.
The potential impact of lower interest rates on used car demand is a key factor. While used car prices have decreased, they haven’t dropped enough to ignite demand from consumers facing two major concerns. First, inflation continues to impact daily living expenses, particularly for low- and middle-income households. While Carvana’s July 2024 earnings report showed higher unit sales and profits per vehicle compared to competitors, it also revealed that the company was selling lower-priced cars, likely to consumers with weaker credit.
The second concern revolves around job security. Many consumers and lenders like Ally are worried about potential job losses. Ally Financial Inc. (ALLY), Carvana’s largest partner, has agreed to purchase $4 billion of Carvana receivables. However, Ally recently warned of increasing auto loan delinquencies, including late-stage delinquencies (over 60 days), which could lead to repossessions. This situation is expected to worsen, and while these loans don’t directly pose a risk to Carvana, Ally may demand better terms on future loans, impacting Carvana’s margins and ultimately, its earnings.
Carvana’s aggressive growth strategy has also resulted in substantial debt. The company currently has $5.4 billion in long-term debt, and servicing this debt will eat into its free cash flow. While lower interest rates will reduce the cost of servicing the debt, the need to pay it down means Carvana can’t be selective with its customer base. This necessitates selling to consumers with potentially higher credit risk, increasing the risk of loan defaults.
CVNA stock’s growth hasn’t been without volatility. In 2024, the stock has experienced sharp drops, often exceeding 20%, particularly when the relative strength indicator (RSI) reached or neared 70. While RSI isn’t a perfect indicator, it does provide insights into a stock’s momentum. Currently, the stock’s RSI is around 68. Furthermore, by most fundamental measures, Carvana is overvalued, suggesting potential for a pullback, perhaps a significant one. This could present an opportunity for investors who have been on the sidelines to enter the market.
