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Will Strategic Use of ADESA Infrastructure Support Carvana's Goal?

Will Strategic Use of ADESA Infrastructure Support Carvana's Goal?

Yahoo21-07-2025
Carvana Co. CVNA is striving to improve in every aspect of its business. It is vigilant about where it earns money and where it spends it. It has an ambitious goal of selling 3 million cars a year and achieving 13.5% adjusted EBITDA margins within the next 5 to 10 years. To achieve this goal, it has been increasing the number of cars it can get ready for sale quickly. Over the past year, it has been working out of about 23 locations on average. In the future, it expects to grow that number to around 60 locations, as the addition of more locations makes it easier to scale up production.In May 2022, CVNA bought ADESA to expand its market presence. The acquisition came with a lot of valuable infrastructure. Since then, Carvana has been steadily opening mega sites that can handle both auction capabilities and reconditioning capabilities.In addition, the company already owns inspection centers that are not being used to their full potential. So instead of needing to build everything from scratch, Carvana can grow by making better use of the facilities it already has. Of course, this growth will still require some spending, but overall, compared to other companies with similar opportunities, Carvana believes it's in a great position to grow efficiently. CVNA carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.While CVNA expects to improve its margin, other auto retailers like Lithia Motors, Inc. LAD and AutoNation, Inc. AN struggle to maintain healthy margins.Lithia reported an adjusted EBITDA margin of 4.4% in the first quarter of 2025 compared to 4% in the year-ago period. High tariffs could cause automakers and parts suppliers to raise prices, forcing Lithia to pass those higher costs on to customers. More expensive vehicles could discourage buyers, leading to lower sales volumes. To stay competitive, Lithia might need to offer discounts or incentives, which would pressure profit margins. AutoNation had been operating below 60% selling, general and administrative (SG&A) as a percentage of gross profit in 2021 and 2022. However, in 2023 and 2024, its SG&A as a percentage of gross profit increased to 63.4% and 66.6%, respectively. The company's degrading operational efficiency is worrisome. Adjusted SG&A was 67.5% of gross profit in the first quarter. The company expects SG&A as a percentage of gross profit in the band of 66-67% for the full year, which is likely to take a hit on its margin.
Carvana's Price Performance, Valuation and Estimates
Carvana has outperformed the Zacks Internet-Commerce industry year to date. CVNA shares have surged 70.9% compared with the industry's growth of 9.5%.
YTD Price Performance
Image Source: Zacks Investment Research
From a valuation perspective, Carvana appears overvalued. Going by its price/sales ratio, the company is trading at a forward sales multiple of 3.61, higher than its industry's 2.17.
Image Source: Zacks Investment Research
EPS Estimates Revision
The Zacks Consensus Estimate for 2025 and 2026 EPS has moved down 7 cents and 5 cents, respectively, in the past 30 days.
Image Source: Zacks Investment Research
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AutoNation, Inc. (AN) : Free Stock Analysis Report
Lithia Motors, Inc. (LAD) : Free Stock Analysis Report
Carvana Co. (CVNA) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
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