Rising Regulatory Burdens And Shifting EV Trends Will Curtail Margins Despite Operational Improvements

Key Takeaways

• Shifting consumer mobility trends and new competitive models threaten Carvana's market share, pricing power, and long-term revenue growth.
  
• Higher compliance and operational costs, along with capital constraints and macroeconomic headwinds, risk compressing margins and limiting growth potential.
  
• Sustained strong growth, operational efficiency, and tech-driven innovation are expanding Carvana's market share, profitability, and customer loyalty, supporting robust long-term profit potential.

Catalysts

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

• The ongoing shift towards electric vehicles (EVs) and the increasing adoption of alternative mobility solutions such as ride-sharing and car subscriptions threaten to shrink Carvana's addressable used car market, placing pressure on long-term revenue growth and threatening the company's ambitious plans to reach three million annual unit sales.
  
• Intensifying regulatory scrutiny and potential changes around data privacy, online consumer protection, and transaction transparency are likely to drive up compliance costs and introduce operational friction, leading to rising SG&A expenses and compressing net margins over time.
  
• Carvana's high capital requirements and debt burden, amplified by the need for substantial future investments in reconditioning facilities and logistical expansion, could restrict technology investments and operational flexibility, resulting in slower EBITDA growth and increased risk to earnings consistency.
  
• Advances in embedded automotive fintech and direct-to-consumer models by manufacturers as well as scaling competition from digitally enabled dealership incumbents may erode Carvana's market share, limit access to attractive inventory, and undermine pricing power, ultimately constraining both revenue and gross profit per unit.
  
• Persistently elevated interest rates and structurally tighter credit conditions are likely to reduce consumer affordability and borrowing appetite for used vehicles, causing lower financed transaction volumes and weakening revenue growth, particularly as Carvana pushes into a larger mix of more expensive vehicles while attempting to sustain premium growth rates.

Carvana Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Carvana compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Carvana's revenue will grow by 17.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 3.9% in 3 years time.
• The bearish analysts expect earnings to reach $1.0 billion (and earnings per share of $5.56) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 93.2x on those 2028 earnings, up from 85.2x today. This future PE is greater than the current PE for the US Specialty Retail industry at 17.6x.
• 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

• Carvana is demonstrating sustained rapid growth and expanding market share, selling 1.5% of all used cars in the U.S. with industry-leading year-over-year unit sales growth of 41%, suggesting strong long-term revenue and market share potential that could surpass current expectations.
  
• The company is achieving industry-leading profitability, with record GAAP operating income, net income, and EBITDA margins, driven by operational efficiencies, lower reconditioning and transport costs, and scale advantages, all pointing to improving net margins and earnings quality over time.
  
• Ongoing investments in technology, AI-driven process improvements, and a vertically integrated finance platform are optimizing vehicle sourcing, pricing, financing, and customer experience, which can further improve unit economics and strengthen recurring earnings over the long term.
  
• Expansion of reconditioning and logistics infrastructure, especially through the integration of ADESA sites, is increasing selection and reducing operational costs per unit, providing operational leverage and supporting higher capacity utilization and future profit margin improvements as volumes scale.
  
• Carvana's strategy to enhance brand awareness, increase customer trust, and grow value-added service attach rates-such as vehicle service contracts and financing-improves customer retention and diversifies revenue streams, supporting more stable and growing long-term profitability.

Valuation

• The assumed bearish price target for Carvana is $285.57, which represents two standard deviations below the consensus price target of $408.95. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $26.5 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 93.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $347.56, the bearish analyst price target of $285.57 is 21.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.