Carvana’s 9,000% rally faces profit test as used-car woes mount

The used-car industry isn’t exactly on firm footing, going by recent events. A major lender went bust just before a big parts supplier followed suit. Loan delinquencies have skyrocketed, car prices remain high and the lower-end consumer is showing signs of buckling. Then there’s Carvana Co. The online retailer has delivered several strong quarters of earnings by cutting costs, restructuring debt and slowing a breakneck expansion. Its shares have rallied 78% this year, pushing its rebound from a rout in 2022 to 9,000%. The stock now trades at 53 times earnings, far more richly than competitors like CarMax Inc. or Lithia Motors Inc., setting up a precarious event for investors ahead of the Tempe, Arizona-based company’s earnings report after the bell Wednesday. Analysts expect the company to deliver an adjusted profit of $1.32 per share, more than doubling from a year ago, on a 40% rise in sales to $5.11 billion. Profit margins are forecast to be about 21.4%, a contraction over the year-ago quarter. “With expectations sky-high and the stock already up sharply, this quarter is all about proving margins can expand without volume cracking,” said Dave Mazza, chief executive officer of Roundhill Financial. “Any stumble in guidance, and momentum traders could hit reverse just as fast as they hit the gas.” There are reasons for concern beyond a valuation that is more in line with a tech growth stock than a car reseller. The company’s customer base is showing signs of economic stress as the labor market weakens and prices for consumer goods continue to rise faster than Federal Reserve officials would like. The bankruptcies of parts supplier First Brands and subprime lender Tricolor Holdings exacerbated worries that worse-off consumers are struggling. CarMax shares plummeted 20% when the company reported quarterly results in September. Auto-loan delinquencies among young borrowers have doubled over the past year, according to Horizon Investments analyst Dmitry Shlyapnikov. “There has been nothing but bad news recently on the auto sector when it comes to the low-end consumer,” Matt Maley, chief market strategist at Miller Tabak + Co. LLC, said. Analysts remain generally bullish that Carvana can deliver, though, with just two of 23 tracked by Bloomberg recommending to sell the shares. The average price target of $423 is 17% above where the shares closed Tuesday. “Evidence continues to mount that Carvana is in the early stages of a strong feedback loop as it scales,” William Blair’s Sharon Zackfia wrote in a note. She anticipates another record report and increased her prediction for used cars sold to hit 154,500, above the consensus estimate of roughly 151,000. Jefferies analysts led by John Colantuoni wrote that Carvana is best positioned to benefit from a shift toward digital car-buying within the $800 billion used vehicle market. Used cars have also become relatively more attractive after President Donald Trump’s tariffs helped push the average price tag for a new car past $50,000. Carvana investors have been on a wild ride since the company captured public attention during the pandemic and then 2021’s meme-stock frenzy. The stock surged nearly 1,200% from the Covid-hit lows in 2020 to its 2021 high, before plunging 98% in 2022’s bear market, leaving the shares trading like a penny stock. The rebound started last year, culminating with a fresh record last month and a market capitalization above $80 billion. That eclipsed century-old auto behemoths like Ford Motor Co. and General Motors Co. The traditional used-car dealers — those that may operate partially online but mainly rely on brick-and-mortar stores, such as CarMax and Lithia —are worth just a fraction of Carvana. “The online model gave them an edge on convenience and reach for sure, but not enough to justify the multiple long term,” said Haris Khurshid, chief investment officer at Karobaar Capital. “It’s basically a capital intensive retailer wearing a tech premium.” --By Jordan Fitzgerald (Bloomberg)

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Carvana’s 9,000% rally faces profit test as used-car woes mount

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