CVNA: Operational Momentum And Market Share Gains Will Sustain Strong Outperformance

Key Takeaways

• Online buying trends and digital adoption support Carvana's long-term growth, aided by demographic shifts toward convenience and e-commerce.
  
• Technology improvements and logistics investments drive cost efficiencies and margin expansion, while new services increase recurring revenue and earnings stability.
  
• Ambitious growth and expansion plans face operational, marketing, and industry risks that could pressure profitability, especially amid intensifying digital competition and used vehicle pricing volatility.

Catalysts

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

• The acceleration in consumer preference for purchasing vehicles online and increased comfort with high-value e-commerce transactions positions Carvana to capture a larger share of the used vehicle retail market, supporting outsized long-term unit and revenue growth.
  
• Ongoing advancements in Carvana's data-driven technology, including integration of AI for operational efficiency and customer-facing processes, enable continual process improvement, reducing per-unit costs and fueling net margin expansion.
  
• The company's scaled logistics and reconditioning infrastructure, bolstered by the integration of ADESA locations, is driving lower delivery and inbound transport costs; as utilization rises, these investments are expected to further enhance operating leverage, improving gross margins and profitability.
  
• Expansion into ancillary products, such as auto financing and service contracts-leveraging proprietary customer and vehicle data-supports higher average revenue per user, stronger recurring revenue streams, and greater earnings stability.
  
• Demographic tailwinds from younger cohorts preferring convenience, digital experiences, and word-of-mouth-driven brand amplification will provide a growing, loyal customer base, providing fundamental support for sustained high revenue growth rates and improved profitability over time.

Carvana Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carvana's revenue will grow by 26.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $8.77) by about September 2028, up from $563.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.5 billion in earnings, and the most bearish expecting $902.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 65.2x on those 2028 earnings, down from 92.0x today. This future PE is greater than the current PE for the US Specialty Retail industry at 18.7x.
• 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's strategy to achieve significant growth (targeting a 40%+ annual unit growth rate for up to 5 years) is highly ambitious, and sustaining such scale could encounter operational bottlenecks, particularly in reconditioning and logistics, risking cost overruns and margin compression, which would negatively impact net margins and profitability.
  
• The company acknowledges that its current and planned expansions, especially related to ADESA site integrations and increased inventory selection, are a near-term investment and run below optimal utilization, resulting in higher operating costs per unit; delays in ramping utilization or unexpected inefficiencies could pressure net income and overall operating margins.
  
• Carvana plans to increase marketing, particularly brand campaigns, to fuel long-term growth, but these investments have uncertain returns and immediate impacts on profitability; an inability to efficiently convert higher advertising spend into lasting revenue growth could deteriorate earnings before scale advantages are realized.
  
• Industry-wide, the shift toward more expensive vehicles and fluctuating used car pricing-exacerbated by tariffs, supply chain disruptions, or market normalization-could both reduce volume growth (fewer buyers able to afford higher ASPs) and increase inventory valuation risk, with direct consequences on top-line revenue and gross margins.
  
• Competitive risk remains significant as traditional dealers are accelerating their digital transformation and as new entrants scale their digital-native used car models; if Carvana fails to maintain differentiated experiences, proprietary data advantages, or financing innovation, its customer retention and pricing power could erode, leading to slower revenue growth and pressure on net margins.

Valuation

• The analysts have a consensus price target of $414.2 for Carvana based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $330.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $33.2 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 65.2x, assuming you use a discount rate of 8.3%.
• Given the current share price of $375.0, the analyst price target of $414.2 is 9.5% 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.