Could Carvana Help You Become a Millionaire?

The stock of Carvana (CVNA -0.68%) has gained attention for its potential to make millionaires. Since its initial public offering (IPO) at $15 on April 28, 2017, the stock soared to a peak of $370.10 on August 10, 2021. Investors who put in $50,000 at the IPO could have seen their investment rise to $1.23 million.

Initially, Carvana's stock price jumped as the demand for used cars surged in 2021. Low-interest rates also contributed to this boom, encouraging investment in speculative stocks. Many investors viewed Carvana's unique online platform, which streamlined the car-buying process, as a significant competitor in the automotive market, likening it to the Amazon of cars. The company also garnered media attention with its eye-catching vehicle "vending machine" towers.

However, by December 27, 2022, Carvana's stock plummeted to an all-time low of $3.72. This decline was driven by several factors: a significant drop in used car prices, a shift from vehicle shortages to surpluses, inflation led to lower consumer spending, and rising interest rates exacerbated auto loan challenges. These adverse conditions revealed heightened losses for Carvana and diminished its inflated valuations.

Despite these challenges, Carvana's stock has rebounded significantly, reaching around $183 recently. A $50,000 investment made at its lowest point would now be worth approximately $2.46 million within just over two years.

Carvana's Recent Performance

The increase in demand for used cars during the pandemic resulted in a robust market when restrictions eased in 2021. However, Carvana has experienced declining unit sales in 2022 and 2023, largely due to high inflation and rising interest rates affecting the market overall.

Metric	2020	2021	2022	2023
Units sold	244,111	425,237	412,296	312,847
Units sold growth	37%	74%	(3%)	(24%)
Revenue	$5.59 billion	$12.81 billion	$13.60 billion	$10.77 billion
Revenue growth	42%	129%	6%	(21%)

After the cyclical decline, Carvana's growth picked up again recently. In the first nine months of 2024, unit sales rose by 28% year-over-year to 301,969, supported by declining interest rates and a recovering used vehicle market.

Carvana is optimistic about continued growth, expecting an increase in retail unit sales in the fourth quarter. This growth is fueled by an increase in unique monthly visitors to its website, which doubled from 8.5 million at the end of 2020 to 17.5 million in the third quarter of 2024. Additionally, the company has broadened its offerings through its acquisition of the online auction platform ADESA in 2022.

In the first nine months of 2024, Carvana's revenue increased by 21% year-over-year to $10.13 billion, with expectations for 25% growth to $13.43 billion for the full year. Furthermore, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive for the first time in 2023 and is projected to approach $1.34 billion in 2024.

Assessing Carvana's Valuation and Risks

Carvana currently holds an enterprise value of $28 billion, which appears undervalued in relation to its growth potential, priced at 2 times next year's sales and 16 times its adjusted EBITDA.

However, investors must also consider some important risks. Over the past five years, Carvana has more than doubled its number of outstanding shares, in part to raise capital and manage stock-based employee compensation. The company reported total liabilities of $7.1 billion and has a high debt-to-equity ratio of 24.7, limiting its ability to secure additional financial resources. Additionally, Ally Financial, Carvana's largest auto loan buyer, has recently highlighted an increase in delinquencies among auto loans.

Insider trading patterns have shown that more shares were sold than purchased by company insiders in the last year, indicating some caution about the stock's future. Compounding these concerns, Hindenburg Research, a firm known for short selling, raised allegations that Carvana had inflated its sales and gross profits. While Carvana dismissed these claims as "intentionally misleading and inaccurate," this scrutiny has affected the stock's stability.

Future Outlook for Carvana's Growth Potential

If Carvana can effectively scale its business and achieve a compound annual growth rate of 15% in revenue from 2024 to 2034, while trading at a reasonable multiple of 3 times sales by that final year, its enterprise value could potentially reach $163 billion.

Such a scenario would transform a $50,000 investment today into approximately $300,000 in a decade. However, this would not replicate the millionaire-making gains experienced in earlier years. Therefore, while it is uncertain if Carvana will become a millionaire-making stock again, it remains a promising opportunity for investors willing to accept considerable volatility and remain focused on the long-term outlook.

Carvana, Stock, Investing