The novel coronavirus may have taken the wind out of many stocks, but for e-commerce plays, things haven’t been so bad. And that’s even the case with names like Carvana (NYSE:CVNA) and Carvana stock.
While not entirely an e-commerce play, investors perceive today’s headwinds as a potential tailwind for the company. Considering the automotive dealer’s business model (customers can buy a car without walking into a dealership), this perception isn’t far off the mark.
Yet with shares bouncing back after cratering in March, it may be prime time to sell. E-commerce stocks have been a smart place to invest during “shelter-in-place,” but as coronavirus enters the rearview mirror and investors bounce back into hard-hit airline, casino, and retail stocks, it’s easy to see recent “hot stocks” like this one take a breather for the time being.
That’s not to say Carvana stock isn’t a potential long-term buy-and-hold. Turning the “old school” auto dealer model on its head, the company is a potential game-changer. Given how well shares have performed as of late, however, it may be best to wait for a pullback before entering a position.
Long Runway For Carvana
“Social distancing” has been a boon for this company and its touchless delivery model, but this tailwind won’t last forever. Investors have bid up the stock, as it’s one of the few business models not completely destroyed by the outbreak. A return to business-as-usual may mean their short-term competitive advantage cools down a bit.
Or does it?
It’s safe to say no one’s a fan of the traditional car dealer model. You walk into a dealership, and an aggressive salesperson pushes you into buying a particular car. You haggle on price, arrange financing, and at the end of the day drive off the lot with your new wheels. But not before fighting off up-sell offers and other hassles.
The lackluster car buying experience has been a “pain point” for generations. However, Carvana turns this frustrating business model on its head. Instead of getting taken for a ride, you can search for the best deal. Instead of wasting a Saturday at the dealership, you simply wait for your new car to be delivered to your home.
Granted, I can see older generations continuing with the “old school” car buying model, out of pure inertia. But as millennials enter middle age and Generation Z comes of age, Carvana has a massive edge over legacy car dealers.
Why It May Be Time to Cash Out
Investors who shrewdly saw that the pandemic wouldn’t hurt e-commerce plays as badly saw quick gains. Assuming they bought in March and are still holding shares today. Shares traded as low as $22.16 per share during the panic selling. Now? Shares change hands around $96 per share.
While I believe this company is on the winning side of trends, shares may have moved too much, too soon. E-commerce stocks were one of the few areas “working” in April and May’s uncertain stock market. But now, “stay at home stocks” like this one could take a breather as investors jump back into hard-hit names like airlines and casinos.
There are also issues on the horizon that could impact Carvana’s underlying business. For one thing, the recent bankruptcy of Hertz (NYSE:HTZ) could create a glut of used cars. Considering this company is operating at a loss in order to gain critical mass, they may need to raise more capital down the road.
In fact, they did raise cash, capitalizing on the recent run-up of its share price. Shoring up their balance sheet is a long-term positive for the company. It gives them the dry powder needed to survive today’s challenging car market, as well as the fuel to sustain continued growth.
In the short-run, a dilutive sale of shares could scare off investors. With this in mind, a pullback in Carvana stock may be around the corner.
However, that doesn’t mean “game over” for this stock. If anything, it could be a great opportunity to enter a long-term position at a reasonable price.
My Take on Carvana Stock? Sell into Strength
There’s no doubt this company is on the ground floor of something big. For decades, customers have loathed the traditional car buying model. But now, thanks to changes in e-commerce, this “pain point” has finally been addressed. Add in the preference for online-only transactions among millennials and Gen Z, and the company has a long runway for growth ahead of them.
Yet excitement over their prospects has made this a crowded trade. Coupled with potential headwinds for the used car space, and chances are there’s a better entry point down the road.
Bottom line? If you own Carvana stock now, sell into strength. Otherwise, wait for a pullback before buying.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
