Carvana (NYSE:CVNA) stock has been one of a handful of online retail stocks that have benefited in a big way over the past few months from the novel coronavirus pandemic pushing shoppers into online shopping channels.
Year-to-date, CVNA stock is up 60% to all-time highs.
At current levels, Carvana stock is fully valued. But that may not stop shares from pushing higher over the next six months as a convergence of tailwinds create the perfect operating environment for the online used car retailer. Against the backdrop of this perfect operating environment, Carvana will continue to report blowout numbers, and bulls will remain in control CVNA stock.
As such, for the foreseeable future, I see Carvana stock pushing higher despite headline valuation risks.
Here’s a deeper look.
CVNA Stock Is a Long-Term Winner
Carvana stock is a long-term winner for one simple reason: the future of buying and selling used cars will be online.
Across the entire auto industry today, less than 10% of sales happen online. That number is going to head way higher over the next decade for a few reasons.
First, the brick-and-mortar car buying process is awful. It takes forever. It requires a lot of back-and-forth. And it’s fragmented, without a streamlined solution, and with many moving, disjointed parts. No wonder more than 80% of consumers do not enjoy the current car-buying process.
Second, pivoting towards an online sales model fixes most of these friction points. It’s quick. It’s convenient. And it’s a centralized, end-to-end, streamlined process that makes car buying much easier and more familiar. It’s just like shopping on Amazon (NASDAQ:AMZN), which we all do.
It’s no wonder that 75% of consumers are open to purchasing a car online.
Third, technological and infrastructure advancements are addressing what were formerly shortcomings of the online model. For example, optimized logistics can now deliver a vehicle bought online nearly as quickly as Amazon delivers packages, while data-driven analysis gives consumers an objective, complete and transparent overview of potential vehicles, without needing to see or test-drive them.
Fourth, consumers are simply ready for this change. Across all major verticals, e-retail sales penetration rates are rising quickly. And this is a rising tide that will lift all boats, auto sales included.
Net net, e-retail sales in the automobile category are on the verge of breakneck, disruptive growth over the next decade. And Carvana is at the epicenter of this megatrend.
To that end, CVNA stock is a long-term winner.
CVNA Stock Is Fully Valued
Although CVNA stock is a long-term winner, shares are fully valued today.
Carvana has attained 0.4% market share in the U.S. used car market. In Atlanta, its most established market, the company is at 2%+ market share. At its current rate of share expansion (20 to 30 basis points per year), Carvana should attain 2%+ national market share by 2025, and near 4% market share by 2030.
Average sales prices on the cars should rise slightly with increased demand and inflation. Huge unit growth plus slight unit revenue growth lays the groundwork for near 1,000%+ sales growth to somewhere around $40 billion in sales by 2030. Assuming the company hits management’s long-term profit margin targets, then on that huge sales base, earnings per share could come out around $15.
Based on a 20-times forward earnings multiple — which is historically average for consumer discretionary stocks — that implies a 2029 price target for CVNA stock of $300.
Discounted back by 8.5% per year, that implies a 2020 price target for CVNA stock of $145.
That’s roughly where shares trade hands today.
So, while CVNA stock has huge long-term upside potential, fundamentally driven near-term upside is capped by valuation.
There Are Strong Catalysts
The fundamentals supporting Carvana stock are maxed out. The optics, however, are not.
Just look at the environment Carvana is operating in today. You have record low financing costs. Interest rates are at zero, while the 10-year Treasury yield and 30-year fixed mortgage rate are at all-time lows.
You have a weak economy. Unemployment has surged. Earnings are down. Job security is down. Yet, there’s also pent-up auto demand, as the average age of cars on the road reached an all-time high in 2019. That creates a perfect backdrop for a used vehicle demand surge over the next few quarters.
You also have Covid-19, which has permanently accelerated e-commerce adoption and made consumers more comfortable with the idea of buying and selling a car online.
Connecting the dots, it’s simply the perfect environment for Carvana.
Over the next few quarters, a ton of consumers, looking to affordably upgrade their old cars, will tap into record-low financing to buy used cars online. Many of those consumers will do such purchases through Carvana’s platform.
As such, Carvana will report strong numbers for the next six months. Strong numbers will force analysts to raise estimates and upgrade the stock. All of those favorable optics will keep bulls in control.
So long as bulls remain in control, CVNA stock can and will keep pushing higher.
Bottom Line on CVNA Stock
Carvana stock is a long-term winner.
Yes, the valuation is maxed out in the near term. But it’s not full enough to offset what are huge optical and operational tailwinds in the pipeline.
Consequently, for the foreseeable future, CVNA stock should sustain its current strength.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN.