Carvana Co. (CVNA) shares have rallied a staggering 640% in the last 12 months with the company’s financial performance turning a corner for the better since early 2023. The stock reached an all-time high of over $360 in 2021 before shedding more than 95% of those gains by December 2022 due to poor financial performance. In Q1, the gross profit per unit came to $6,432, an eye-popping improvement from around $2,000 in 2022. The adjusted EBITDA margin also turned positive, coming at 7.7%, compared to -8% during most parts of 2022. Total adjusted EBITDA for Q1 hit a record high of $235 million, highlighting the strong comeback of the used car retailer. In addition to this improved operating performance, the company has successfully improved its balance sheet health by repurchasing $250 million of its senior notes due in 2028, reducing the total leverage of the company. This decision is expected to save $55 million in interest expense through 2026 as well.

What To Keep In Mind

Carvana faces a few challenges today, the most threatening one being a decline in used car prices. According to the latest data released by the Bureau of Labor Statistics, used car prices fell 1.4% in April compared to March, bringing the total decline since February 2022 to almost 17%. The Manheim Used Vehicle Value Index, which is a benchmark used to gauge a measure of used car prices, declined to 197.3 in May. The index was valued at over 250 in 2022 when used car prices were soaring due to strong consumer spending and a lack of new vehicle supply. The ongoing decline in used car prices will impact Carvana’s gross profit per unit, thereby making an expansion in profitability challenging in the foreseeable future.

Another challenge is the high debt load even after strengthening its balance sheet in recent months. The company still carries almost $5 billion in long-term debt, and the elevated interest-rate environment will make it challenging for Carvana to survive if the company does not bring in sufficient operating cash flows. To overcome this, the company is seeking alternative ways to raise funds.

How The Industry Views Carvana

Carvana’s notable improvement in financial performance has caught the attention of Wall Street analysts. Last month, JPMorgan analyst Rajat Gupta upgraded Carvana citing that the company’s aggressive investments in infrastructure will yield sustainable competitive advantages, enabling Carvana to enjoy above-average profit margins in the long run. The analyst has a price target of $130 for Carvana, which suggests the stock is undervalued even after a record-breaking run in the last 12 months. Evercore ISI analyst Michael Montani joined the party yesterday claiming that Wall Street consensus estimates for Carvana’s Q2 earnings are conservative to the extent they do not accurately reflect the economic reality facing Carvana. The analyst added Carvana to Evercore’s tactical trading list. Based on the ratings of 16 Wall Street analysts, the average Carvana price target is $108, which implies the stock is fairly valued in the market today.

Dilantha DeSilva has no positions in any of the stocks mentioned. Stocks.News has no positions in any of the stocks mentioned. Please see our disclosure page for more information.