Carvana Co.'s (NYSE:CVNA) P/S Is Still On The Mark Following 30% Share Price Bounce

Carvana Co. (NYSE:CVNA) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in the United States' Specialty Retail industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Carvana as a stock to avoid entirely with its 2.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

View our latest analysis for Carvana

How Has Carvana Performed Recently?

Carvana certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Carvana.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Carvana would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. Revenue has also lifted 5.5% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 20% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 5.9% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Carvana's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Carvana's P/S

Carvana's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Carvana shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Carvana (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.