Carvana (NASDAQ:CVNA) stock has had a weird or at least unexpected ride these last weeks, tumbling nearly 45% year-to-date.
The used car dealer known for its vending machine storage units, offers investors a mystery.
While used car prices remain high, with dealers like AutoNation (NYSE:AN) seeing fairly stable stock prices, Carvana stock is down by more than 50% in the last year. It trades today at around $135 with a market cap of nearly $24.6 billion on estimated 2021 revenue of $10.6 billion.
Carvana is due to report earnings after the market closes Feb. 24. A loss of about $140 million, 78 cents per share, is expected on revenue of $3.53 billion. The loss looks bad because Carvana is investing ahead of 100% growth. Revenue was $5.6 billion in 2020. It’s expected to be $10.9 billion for 2021. The question is whether you buy into this drop.
The Bull Case for CVNA Stock
Growth has many analysts on Carvana’s side. One has labeled CVNA stock an “apex predator.” Tipranks lists 14 analysts following Carvana stock and 10 say buy it. Their forecast is that the price could double in the next year.
CVNA stock was a pandemic-era star, a “disrupter” that made car-buying simple and delivered the products to customer homes. Its Super Bowl ad this year featured a woman touting the company to everyone she met.
Carvana’s size made it the obvious choice to unload Hertz Global (NASDAQ:HTZ) inventory when that company committed to renting Tesla (NASDAQ:TSLA) electrics. Its size meant Carvana could pitch its own third-party network to dealers, combining inventory to offer buyers better choices.
The Bear Case for Carvana
Despite its online cache and its rapid growth, Carvana is still a used car dealer. Its costs are rising alongside the prices buyers are paying. Some customers say they’ve sometimes gotten more from Carvana than they paid when the vehicles were new.
Carvana cars are often sold sight unseen. This can lead to trouble. One buyer in Denver said he got a stolen, damaged vehicle. Carvana has also been charged with selling cars without clear title. Its business licenses have been threatened or suspended in several states over the issue.
Carvana also has conflicts of interest. The company was originally spun out of privately-held DriveTime Automotive, which is a 132-dealership chain started by CEO Ernie Garcia III’s father.
DriveTime took in about $85 million during 2021 renting Carvana real estate, providing extended warranties and collecting on loans. Carvana also bought thousands of cars from DriveTime during last year’s car shortage. Between them, the Garcias control 85% of Carvana’s voting shares. Carvana’s growth is fueling DriveTime’s bottom line.
Despite the red flags, CVNA stock was selling for as much as $361 in September. Its fall has been accelerating since late December. The stock fell by 30% in January alone. Bulls blamed declining growth with the pandemic’s end and a turn away from growth stocks.
The Bottom Line
Not all used car companies are seeing plunging stock prices. AutoNation is down just 4% on the year. Its two-year stock performance has now doubled that of Carvana. Other rivals like Group 1 Automotive (NYSE:GPI) and Carmax (NASDAQ:KMX) have also outperformed CVNA stock since the start of the year.
Based solely on fundamentals, Carvana is a buy, but I don’t think I’d be buying here. The conflicts of interest are troubling. The problems with state licensing authorities raise red flags. Carvana may have stretched its neck out too far to buy growth. It may not be done paying the price.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack.