The Price Is Right For Carvana Co. (NYSE:CVNA) Even After Diving 35%

Carvana Co. (NYSE:CVNA) shareholders won't be pleased to see that the share price has had a very rough month, dropping 35% and undoing the prior period's positive performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 131%.

In spite of the heavy fall in price, when almost half of the companies in the United States' Specialty Retail industry have price-to-sales ratios (or "P/S") below 0.3x, you may still consider Carvana as a stock probably not worth researching with its 1.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Carvana will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Carvana?

The only time you'd be truly comfortable seeing a P/S as high as Carvana's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. As a result, it also grew revenue by 6.7% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 19% per year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 5.7% per year growth forecast for the broader industry.

With this information, we can see why Carvana is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Carvana's P/S?

Carvana's P/S remain high even after its stock plunged. 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.

We've established that Carvana maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Specialty Retail industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Carvana is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

If these risks are making you reconsider your opinion on Carvana, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.