Since the start of 2023, shares of Nvidia (NASDAQ: NVDA) have surged 785% higher. The artificial intelligence (AI) boom has lifted this business to new heights, and investors couldn’t be more excited about its prospects.
However, one e-commerce stock has skyrocketed more than the AI infrastructure enterprise. Shares of the booming online car retailer Carvana (NYSE: CVNA) are up 3,270% since the beginning of 2023, which would’ve turned $1,000 into almost $34,000 today.
You might be thinking that it’s time to ride the momentum to huge returns. But is it too late to buy Carvana stock?
Improving fundamentals
To say that Carvana was a struggling enterprise might be putting it lightly. In fact, the company was quite literally on the verge of bankruptcy, which was spurred by Carvana’s acquisition of the ADESA auction platform. The leadership team restructured its debt a year ago, lowering interest payments and extending maturities.
Cleaning up the balance sheet, or management’s actions that at least gave the company some breathing room, worked wonders to boost investor sentiment toward the stock. Near-term uncertainty was drastically reduced.
Carvana also deserves credit for improving its fundamentals. In 2022, the business reported a 3% volume decline, and the net loss ballooned to $2.9 billion. Revenue and unit volume tanked in 2023, but a relentless focus on cost cuts drastically improved the income statement.
Although they’re tiny figures, Carvana has posted positive earnings in each of the first two quarters of 2024. The company is also growing again. The stock’s monster performance shows that when the market has extremely low expectations, even the smallest fundamental improvements can have a beneficial impact. But Carvana isn’t out of the woods just yet.
Big picture
If we simply ignore the company’s financial picture (Carvana still carries $5.6 billion in long-term debt), it’s clear that Carvana is solving a big problem in the industry. Consumers generally aren’t happy with the traditional car-buying process. Shoppers must haggle with a salesperson, deal with lots of paperwork, and choose from a limited inventory. Plus, it doesn’t help that the entire process can take hours.
Here’s where Carvana truly shines. Consumers can buy a car and obtain financing in a matter of minutes. And there’s a huge nationwide pool of cars to choose from. What’s more, Carvana offers free delivery on select cars, and there’s also a seven-day trial period. It’s no wonder the business sold 131% more units in the latest quarter than it did five years before in Q2 2019.
It’s easy to be optimistic about long-term growth prospects, too. Last year, about 36 million used cars were sold in the U.S., which gives Carvana less than 1% market share based on 2023 figures. This is an extremely fragmented industry that an online-only platform could penetrate and command a bigger portion of.
But there’s competition. There are traditional dealerships, many of which are starting to bolster their digital offerings, and Carvana must also contend with scaled car retailers like AutoNation and CarMax.
Moreover, Carvana’s ultimate success is far from certain. A lot can go wrong, like the business running into financial troubles again or the economy entering a severe recession. In the latest quarter, 67% of operating income went toward paying interest expenses, which doesn’t leave much wiggle room.
Pessimism to optimism
At their low point in December 2022, shares traded at a dirt cheap price-to-sales ratio of 0.025. That multiple has soared to 2.6 today. The valuation is no longer compelling, in my opinion. That argument holds more weight when you realize that Carvana remains a risky business to own.
Investors should think twice before buying the stock.
Should you invest $1,000 in Carvana right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax and Nvidia. The Motley Fool has a disclosure policy.
1 Stock That Has Skyrocketed More Than Nvidia Since the Start of 2023: Is It Too Late to Buy? was originally published by The Motley Fool
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