Carvana’s (CVNA) Remarkable U-Turn Tempered by Macro Headwinds

Carvana Co. (CVNA), an e-commerce platform for used vehicles in the U.S., has experienced a notable 812% recovery from its 2023 lows, driven by a significant improvement in its business fundamentals. The market has recognized this progress, valuing the company at a premium as it now stands out as one of the country’s fastest-growing publicly traded automotive retailers. An analysis of the company’s unit economics highlights Carvana’s solid profitability.

While I maintain a neutral stance on the stock at current valuation levels, given potential macroeconomic headwinds, I view Carvana as a well-managed organization with a compelling long-term outlook.

Carvana’s Stellar Gross Profit Growth

One of the main reasons Carvana deserves a valuation premium compared to its peers is its strong unit economics growth in the past couple of years. In the first quarter, gross profit increased by almost 8% YoY to $6,938, setting a record high for any first quarter in the company’s history. For context, less than five years ago, Carvana’s gross profit per unit (GPU) was around $2,000, which highlights the strong profitability growth the company has achieved.

A closer look at GPU growth in recent years reveals several factors have contributed to this growth, including reconditioning efficiencies, reduced inbound transportation costs, strong growth of the wholesale business, higher fixed cost leverage, and increased advertising efficiency resulting from highly targeted marketing and AI integration.

What is even more encouraging is how Carvana achieved strong GPU growth despite a notable decline in used car prices. For context, the price index for used cars and trucks in the U.S. hit an all-time high in February 2022 before retreating. Despite this, Carvana’s GPU has increased at a stellar pace thanks to changes to its business model.

Carvana is Fundamentally Stronger Than Before

I am also encouraged by Carvana’s efficiency gains since 2022. In Q1, Carvana sold nearly 134,000 retail units, marking an all-time quarterly high, eclipsing the previous high of approximately 118,000 units sold in Q2 2022. What stands out is how Carvana achieved this feat as a more nimble, efficient business. For instance, the company has reduced its inventory levels by around 30% compared to Q2 2022, boosting profit margins. Back in the day, Carvana’s high inventory levels led to substantial operating expenditure, threatening profitability.

In addition, Carvana achieved record-high unit sales in Q1 while slashing advertising costs by 45% compared to Q2 2022, which highlights the notable marketing efficiencies the company has realized during this period. The total headcount has also seen a 16% reduction between Q2 2022 and Q1 2025 as Carvana has optimized its business operations by integrating advanced technologies. Operational efficiencies discussed above have boosted profit margins. From a net loss margin of 11.3% in Q2 2022, the company has come a long way to achieve profitability at a net income margin of 8.8% in Q1 2025, while also booking a 17% increase in the adjusted EBITDA margin.

Interestingly, Carvana is not done yet. In Q1, the company saw SG&A expenses per unit decrease by a meaningful 19.5% YoY, underscoring how the company continues to grow profitably even at a higher scale.

Carvana Set to Be Tested

Carvana has made significant progress in improving its operating profile, paving the way for the company to achieve its three-step plan (positive adjusted EBITDA, unit economics growth, and returning to growth) ahead of schedule. Although the business is fundamentally stronger than ever, a few major risks are looming on the horizon.

One of the significant risks facing the used car industry is elevated vehicle financing costs. According to the Federal Reserve, the average finance rate for used cars is over 16% today, compared to around 12% in 2021. Carvana, so far, has thrived amid challenging interest rate dynamics, but persistently high interest rates will eventually hurt used car sales, shrinking the total pie for auto retailers. Even if Carvana were to gain market share, we are looking at a hit to revenue growth in the coming quarters.

In addition, new car inventory trends are normalizing after a period of below-par inventory growth due to semiconductor shortages. The lack of new car inventory has driven the demand for used cars higher in recent years, but this trend is on the verge of reversal. Recession fears that have resurfaced due to aggressive tariff announcements may also impact discretionary spending, affecting the growth of the used car market.

Is Carvana Co. a Buy, Sell, or Hold?

Analysts are cautious even on the back of a strong first-quarter earnings print. CVNA stock carries a Moderate Buy consensus rating based on 11 Buy, five Hold, and zero Sell ratings over the past three months. CVNA’s average stock price target of $303.57 implies approximately 1.2% upside potential over the next twelve months.

See more CVNA analyst ratings

According to Needham analyst Chris Pierce, more boring days are ahead as growth is likely to slow down despite efforts to drive down fixed costs. Meanwhile, J.P. Morgan analyst Rajat Gupta also sees Carvana growing EBITDA at a healthy rate but has warned that the new tariff environment may lead to macroeconomic challenges.  

Although Carvana is firing on all cylinders, the company is richly valued at a forward P/E of almost ~105. Despite room for profitable growth in the next few years, this premium valuation offers little margin of safety to invest in the company. Some of Carvana’s direct competitors are much cheaper today. For example, CarMax, Inc. (KMX) and AutoNation, Inc. (AN) are valued at a forward P/E of just 18 and 10, respectively.

Positive Carvana Outlook Tempered by Limited Margin of Safety

Carvana has demonstrated strong management and has consistently exceeded expectations over the past few years. Its continued market share gains from traditional auto retailers support its premium valuation relative to industry peers. However, the elevated valuation offers a limited margin of safety, which underpins my neutral view of the stock.