Potentially, Could Carvana Propel You Towards Millionaire Status?
Potentially, Could Carvana Propel You Towards Millionaire Status?
Let's cut the bullshit. Individuals throwing their money into the stock market aim for one thing - riches over time. The end game might be hitting a $1 million portfolio value.
A few companies, like Carvana (CVNA -4.00%), have hit that mark. This online used car business has grown by an astounding 5,120% since the beginning of 2023 (as of Dec. 12). That means a $20,000 investment would've turned into a cool million in under two years, an unbelievable ROI.
If you didn't hop on the Carvana ride, you're probably wondering if it can still make you a millionaire. Here's what potential investors need to know about this resurging company's prospects.
Carvana's rise, fall, and rebirth
From its IPO in April 2017 to its all-time high in August 2021, Carvana shares skyrocketed 3,230%. That period also produced a fair share of millionaires.
Carvana thrived by disrupting the used car market in the US. Customers typically visited brick-and-mortar dealerships, dealt with annoying salespeople, haggled on prices, and searched for loans. Plus, the entire process could consume an entire day.
Carvana changed the game. Operating online, managing a nationwide inventory, and boosting tech capabilities made buying a car smooth. Consumers could browse online, get financing, and complete purchases in minutes. There's even a seven-day trial.
From 2014 to 2021, Carvana's revenue skyrocketed 305-fold, from $42 million to $12.8 billion. This was all thanks to expansion into new markets and selling more vehicles.
But then, Carvana hit the brakes. Tough economic conditions starting in 2022 hurt Carvana's performance. Unit sales dropped 26% between 2021 and 2023.
Carvana's debt situation was the major issue. The company was so deep in debt that management had to restructure its obligations in July 2023 to survive. Shares plummeted 98% in 2022, a year when the company suffered a $2.9 billion net loss.
The last few quarters have seen Carvana's remarkable recovery. Leadership focused on reducing expenses and finding efficiencies. The financial results have been impressive, with revenue and car volume increasing 32% and 34%, respectively, in the last quarter.
Gross profit per unit, a key metric tracked by leadership, hit an all-time high of $7,427 in Q3. This was up 25% compared to the previous year. This helped improve profitability figures significantly.
High expectations
After a stock's price jumps 52-fold like Carvana's has in under two years, smart investors should question if the valuation still makes sense. It's crazy that Carvana shares were priced at a cheap P/S ratio of 0.031 at the start of 2023. The market was skeptical that the company was heading for bankruptcy. Pessimism was at an all-time high.
As financial results improved, investor sentiment became excessively bullish and optimistic. As of now, the stock trades at a P/S multiple of 3.38. Historically, Carvana's average P/S ratio is just 1.2. The current situation certainly looks pricey, if past trends are any indication. That's one reason to steer clear, as the belief is that the easy money has already been made.
If that valuation isn't worrying enough, consider Carvana's financial situation. While the company has improved on the bottom line, it's still in a precarious position. As of Sept. 30, Carvana boasted $5.6 billion in long-term debt. Its interest payments from the last four quarters totaled $668 million, barely covered by its cumulative operating income of $692 million during that period.
Carvana's comeback has been nothing short of amazing. And I'm sure the stock's rise has made some risk-takers millionaires. But if you're thinking about buying shares today, I believe the odds of becoming a millionaire are slim. In fact, I think the stock should be avoided.
This resurging company's remarkable recovery has seen its revenue and car volume increase significantly, with gross profit per unit also hitting an all-time high. However, with a current P/S multiple of 3.38, historically much lower than its average, and a precarious financial situation with $5.6 billion in long-term debt, the odds of becoming a millionaire by investing in Carvana today may be slim. In finance, wise investors consistently evaluate whether the current valuation of a stock makes sense in relation to its potential future earnings and financial stability.