Based on the recent earnings print of online car retailer Carvana (NYSE:CVNA), the upside narrative seems much more reasonable. As TipRanks contributor David Moadel emphasized, Carvana didn’t just avoid a complete meltdown following the loss of its pandemic-related catalyst. Instead, the company, in many ways, thrived. Subsequently, Moadel is bullish on CVNA stock. I, on the other hand, am bearish due to the unfavorable fundamentals.
Optimists of CVNA Stock Have Reason to Smile
Central to Moadel’s belief in CVNA stock is the auto retailer’s robust fourth-quarter earnings report. Specifically, the company delivered adjusted EBITDA of $60 million, contrasting nicely with the loss of $291 million in the year-ago quarter. Also, while Carvana posted a net loss of $1 per share, this was a significant improvement to the loss of $7.61 in Q4 2022.
To Moadel’s point, CVNA stock isn’t perfect – far from it. However, the “name of the game here is improvement, not perfection.”
Of course, Carvana could definitely use some improvements in key areas. For one thing, the loss per share represented a greater magnitude of red ink compared to the expected loss of 85 cents per share. Second, revenue landed at $2.42 billion, representing a decrease of 15% on a year-over-year basis. This tally also missed the consensus target of $2.56 billion.
However, the bulls had the last laugh when the market closed last week. In the current quarter, Carvana’s adjusted EBITDA should land “significantly above $100 million,” per management’s latest guidance. As Moadel stated, analysts previously called for Carvana to report Fiscal 2024 adjusted EBITDA to land around $108 million.
No Longer a Deal
Naturally, the substantially improved expectations contributed to CVNA stock skyrocketing. Last Friday, it gained just a hair over 32%. In the trailing 52 weeks, CVNA has now gained over 687%, an utterly astounding figure.
Nevertheless, the question now centers on sustainability. Can Carvana stock continue its stratospheric ascent? Frankly, the evidence doesn’t point in a favorable direction.
From a valuation perspective, Carvana just isn’t a great deal anymore. Right now, shares trade at a revenue multiple of 1.29x. Stacked against the broader auto and truck dealership sector’s average sales multiple of 0.56x, CVNA stock seems overpriced.
On the earnings side, Carvana runs a high multiple of 92.3x. However, the sector average sits at around 10x. Whichever way you want to cut it, CVNA just doesn’t offer a great angle for current speculators.
The Fundamentals Matter
Another element that cannot be ignored is the core fundamentals of the consumer economy. Back when Carvana stock was flying to the moon, it did so based on a sensible, fundamentally sound catalyst: people were scared to take public transportation due to COVID-19. Therefore, many east-coast city dwellers found themselves buying a vehicle for the first time.
By its inherent nature, Carvana’s car delivery business model is effectively contactless. So, CVNA stock enjoyed a clear upside catalyst. However, the implosion of its market value is also understandable. Around early 2022, pandemic fears faded sharply. With that, it didn’t make sense for consumers to pay a higher premium for the convenience of car delivery services. Instead, they could go to traditional dealerships or even engage in private-party transactions.
Stated differently, it appears that the main reason why CVNA stock jumped so much was because of intense short interest. With panicked bears covering their positions, Carvana had nowhere to go but up.
However, it’s unlikely that this scenario will continue to support shares because the fundamentals remain poor. This time, it’s not about a health crisis fading but rather a financial crisis brewing. With Americans’ overall credit card debt spiking to a record $1.13 trillion, they’re just not robustly capable of buying cars – especially cars with delivery service premiums.
Even worse, credit card delinquencies are rising. That’s not what you want to hear as a retailer, especially one that offers a premium service.
Smart Money Gets Skeptical
Looking at options flow data – which screens exclusively for big block transactions likely placed by institutions – sentiment for CVNA stock appears bearish. That’s not surprising, given that Carvana is no longer trading at a discount, its stock has already soared to low-earth orbit, and its prospective customers are saddled with debt.
Specifically, one transaction in the options flow screener stood out — 11,134 contracts sold of the CVNA Mar 15 ’24 65.00 Call. At face value, this is a wager that Carvana stock will not rise above the $65 strike price by the expiration date of March 15. The trader or traders that placed this bet received a premium of $3.88 million.
Given the discrepancy between the volume last Friday versus the open interest (2,999 contracts), it seems like an aggressive transaction. It’s possible – though it can’t be definitively proven – that some of these contracts may be uncovered.
Combined with heavy put volume – such as on the CVNA Mar 15 ’24 85.00 Put – the message seems to ring loudly: the smart money sees high risk with Carvana stock.
Is CVNA Stock a Buy, According to Analysts?
Turning to Wall Street, CVNA stock has a Hold consensus rating based on two Buys, 10 Holds, and three Sell ratings. The average CVNA stock price target is $51.45, implying 26.8% downside risk.
The Takeaway: The Numbers Don’t Carry CVNA Stock Anymore
While Carvana may have benefited from a short squeeze earlier, the core fundamentals no longer favor the company. Aside from the stratospheric performance of CVNA stock, it’s now overvalued, and the underlying consumer economy has weakened considerably. Subsequently, it’s not surprising that the smart money is betting against the security. That’s the neon flashing warning sign to get out of Dodge.
