High-flying Carvana (NYSE:CVNA) has seen its stock plummet over the past month. CVNA stock had topped $110 before the market crashed in February, dropping it as low as $29.35 a week ago. The $2 trillion economic stimulus bill has helped investors gain some confidence, and Carvana has bounced back a bit. However, doubts about the high-tech used car seller remain.
With a record 3.28 million Americans applying for unemployment benefits last week, will the market for big ticket items like cars implode? And if so, how long will the drought last?
A number of analysts feel that Caravana is going to perform strongly coming out of the crisis caused by the novel coronavirus. Among the investment analysts polled by CNN Business, CVNA stock has a buy rating. More telling is the median 12-month price target of $95.50, representing over 90% upside.
Carvana Advantages: No Showrooms, Used Cars
Two of Carvana’s key selling points have become a more formidable advantage over traditional new car dealers.
With the coronavirus pandemic sweeping the U.S., Carvana’s e-commerce approach to selling vehicles is suddenly even more appealing. There’s no need to visit a showroom or even leave your house. View the car online, buy it online, finance it online and Carvana delivers it to your house. Or go pick it up at one of the company’s “car vending machines.” Either way, virtually no human interaction is involved.
Carvana focuses on recent model used vehicles. That means substantially lower prices than new, while still offering appealing cars. In 2018, the average price of a new car in the U.S. hit $35,828, while a one to three year-old used car cost $22,489 on average. Carvana’s used vehicles are certified to be in good mechanical condition, with a warranty and a seven-day money-back guarantee.
Used Cars May Fare Better Than New
During the global financial crisis of 2008, new car sales dropped like a rock. In the U.S., that meant going from 15 million in 2005 to under 10 million in 2008, a 33% drop. According to research by Efraim Benmelech, a finance professor at Northwestern’s Kellogg School of Management, there were two primary reasons for the abrupt drop in sales. The first was the most obvious result of the recession: after suffering a job loss, many people suddenly found themselves unable to afford to buy a new car.
That argument would support the possibility that in a post-coronavirus economic downturn, the more affordable used cars offered by Carvana could still fare well. At least better than new car sales. A second factor was also identified by professor Benmelech.
“Some people actually did want or need to buy new cars … but they couldn’t because they didn’t have enough cash—and they couldn’t get a loan or a lease agreement either, because the financing institutions that would normally make these agreements were also constrained in the crisis.”
In addition to financial institutions coming into the coronavirus crisis in much better shape than they were in during the 2008 crisis, the economic stimulus bill will also help address the credit shortfall that happened in 2008.
Whatever the reason — job loss, lack of access to credit, or reluctance to make a big ticket purchase in a gloomy economic time — used car sales also suffered. In the U.S. they dropped from over 44 million in 2005, to 36.5 million in 2008. That’s a decline of 17%. Significant, but roughly half the impact felt by new car sales.
That difference in severity of impact helps to explain why analysts are feeling generally positive about CVNA stock’s prospects over the next year, while Ford (NYSE:F) has seen its stock downgraded to junk status.
Bottom Line on CVNA Stock
The takeaway? The current economic decline is for completely different reasons than the 2008 financial crisis. However, we have already seen some of the same results, including massive stock market losses. With record unemployment being reported, it seems likely that once again the market for new car sales is going to take a hit.
However, if used car sales help pick up the slack, there is definitely upside for CVNA stock.
Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015. As of this writing, he did not hold a position in any of the aforementioned securities.
