Digital Car Purchasing And Automated Reconditioning Will Transform Industry

Key Takeaways

• Advanced digital operations, streamlined logistics, and AI automation could enable Carvana to outperform competitors in cost structure, margins, and operating leverage.
  
• Growing digital adoption and integrated services position Carvana to capture market share, boost pricing power, and increase long-term customer value.
  
• Secular shifts in vehicle usage, increased competition, regulatory risks, and financial constraints threaten Carvana's growth, margin stability, and long-term profitability as industry dynamics evolve.

Catalysts

Operates an e-commerce platform for buying and selling used cars in the United States.

• Analyst consensus expects scale efficiencies and increased unit volume from ADESA integration, but the true upside may be far greater as Carvana accelerates to 3 million cars sold annually; the emergence of a nationwide, technology-driven reconditioning network could make them the undisputed leader in both selection and cost structure, underpinning unprecedented revenue and EBIT margin expansion.
  
• Analysts broadly agree Carvana's operational improvements will lower costs and lift margins, but as overhead and transport efficiencies compound and AI-driven automation matures, Carvana's unit economics could outpace rivals for years, with fixed costs shrinking materially as a percent of revenue-potentially unlocking operating leverage the market has not yet priced in.
  
• Soaring consumer adoption of end-to-end digital car buying-still in its infancy-allows Carvana to capture massive latent market share as consumers shift online, supporting not only elevated unit growth but also durable pricing power and improved inventory turns, both highly accretive to top-line growth and cash flow.
  
• Carvana's deep, proprietary integration of online vehicle financing and adjacent services positions them to generate higher attachment rates and capture incremental lifetime customer value, translating into sustained gains in other gross profit per unit and net income over time.
  
• With regulatory momentum favoring transparent, customer-first models, Carvana's advanced compliance infrastructure and digital consumer protection could accelerate consolidation in their favor as traditional dealerships lag, expanding both their total addressable market and long-term structural returns above current consensus expectations.

Carvana Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Carvana compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Carvana's revenue will grow by 32.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.5% today to 10.6% in 3 years time.
• The bullish analysts expect earnings to reach $4.0 billion (and earnings per share of $17.44) by about August 2028, up from $563.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 42.2x on those 2028 earnings, down from 87.7x today. This future PE is greater than the current PE for the US Specialty Retail industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Carvana Future Earnings Per Share Growth

Risks

• Rapid adoption of electric vehicles and shifts toward new EV distribution models could diminish Carvana's addressable used vehicle market over time, leading to structurally slower revenue growth as used ICE vehicle volumes secularly decline.
  
• Long-term shifts in personal transportation preferences, such as increased urbanization and growth of ride-sharing or micro-mobility alternatives, could drive a gradual reduction in personal vehicle ownership, potentially suppressing demand for used cars and creating significant headwinds for Carvana's unit sales and top-line revenue.
  
• Heightened regulatory environments around data privacy and digital commerce present the risk of increased compliance costs and possible reputational harm if Carvana's digital model encounters privacy breaches or customer trust issues, which would directly erode net margins and threaten customer acquisition.
  
• Ongoing elevated debt levels and leverage restrict Carvana's financial flexibility, leaving it exposed if market conditions or operating trends worsen, which could impact its ability to fund growth investments or service obligations-ultimately putting pressure on free cash flow and net earnings.
  
• Greater competition from traditional dealerships expanding their own digital offerings as well as from new digital-first auto retailers could compress margins, escalate customer acquisition costs, and slow Carvana's unit growth trajectory, risking a deceleration in both revenue and bottom-line profitability as the industry landscape evolves.

Valuation

• The assumed bullish price target for Carvana is $500.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Carvana's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $230.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $37.9 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 42.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $357.75, the bullish analyst price target of $500.0 is 28.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.