Carvana’s stock price surged 0.7% to $242.15 in the recent trading session, outperforming the S&P 500’s daily loss of 1.46%. The company’s shares have gained 11.8% over the past month, surpassing the Retail-Wholesale sector’s 2.27% increase and the S&P 500’s 1.08% rise. Investors are eagerly awaiting Carvana’s upcoming financial results, set to be announced on February 19, 2025.
Analysts expect the company to report earnings of $0.25 per share, a year-over-year growth of 125%. Revenue is projected to reach $3.34 billion, a 37.8% increase from the same quarter last year. Recent changes to analyst estimates for Carvana reflect an evolving business landscape.
Positive revisions often indicate growing optimism about a company’s business and profitability. Research suggests that these estimate changes are closely correlated with near-term stock prices. Investors can use the Zacks Rank system to take advantage of these changes.
The model classifies stocks from #1 (Strong Buy) to #5 (Strong Sell) and has a notable track record of outperformance. Carvana currently holds a Zacks Rank of #3 (Hold). In terms of valuation, Carvana is trading at a Forward P/E ratio of 90.28, significantly higher than the industry average of 21.67.
The Internet – Commerce industry, part of the Retail-Wholesale sector, has a Zacks Industry Rank of 70, placing it in the top 28% of all industries. Research shows that industries ranked in the top 50% tend to outperform those in the bottom half by a factor of 2 to 1. Carvana’s recent stock performance and positive analyst estimates suggest a promising outlook for the company.
Investors should keep an eye on the upcoming earnings report and use tools like the Zacks Rank to stay informed about the stock’s potential in the near term. Carvana, known for its distinctive glass tower car vending machines, has been generating buzz lately. The company’s stock price has soared by 97% in the past six months, reaching $243.09 per share, partly due to its solid quarterly results.
Investors are questioning whether this momentum will continue or if the stock’s rise is simply a result of heightened investor enthusiasm. Carvana offers a convenient automotive shopping experience through its online platform for buying and selling used cars. The company’s unique business model and recent financial performance have sparked both optimism and caution among investors.
Two reasons to like Carvana are its outstanding long-term EPS growth and increasing free cash flow margin.
Carvana gains amid market decline
Carvana’s earnings per share have made a significant turnaround over the past three years, shifting from negative to positive, indicating profitable growth.
Additionally, the company’s free cash flow margin has expanded by 23.2 percentage points over the last few years, suggesting improved financial health. However, one reason to be careful is the declining retail units sold, which indicate potential product weakness. Despite revenue growth, Carvana has faced challenges in engaging its audience over the past two years, with retail units sold declining by 23% annually.
This trend suggests potential weaknesses in Carvana’s product appeal or a need for innovation. While Carvana does have some shortcomings, its merits seem to outweigh the flaws. The stock is currently trading at 22.5× forward EV-to-EBITDA.
Whether this is a good time to buy depends on one’s confidence in Carvana’s ability to address its challenges and sustain its recent growth. Return on equity (ROE) is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. It measures the profitability of a company in relation to shareholders’ equity.
The formula for ROE is straightforward: Return on Equity = Net Profit ÷ Shareholders’ Equity. Based on this formula, Carvana’s ROE is 16%, meaning that for each $1 of shareholders’ capital, the company made $0.16 in profit. Carvana’s ROE is similar to the industry average of 19%.
However, it is essential to check if the company’s ROE is impacted by high debt levels, increasing its financial risk. Most companies need capital to grow their profits, which can come from retained earnings, issuing new shares, or borrowing. When a company uses debt, it can improve its returns without changing the equity, thus boosting the ROE.
However, this also increases financial risk. Carvana uses a significant amount of debt to maximize its returns, having a debt to equity ratio of 17.59. While its ROE is good, the heavy reliance on debt dampens overall enthusiasm.
In conclusion, return on equity is a useful indicator of a business’s ability to generate profits and return them to shareholders. Ideally, high-quality companies have high return on equity with low debt levels. It’s also crucial to consider other factors such as future profit growth and the required investments going forward.
