Why High-Revving Carvana (CVNA) is a Hold Despite Market U-Turn

Business Insider

6 days ago

Carvana Co. (CVNA), the online used-car retailer, appears to be in the midst of an extraordinary rebound. After teetering on the edge of collapse just a few years ago and experiencing a hype-driven surge in 2021, the stock has staged one of the most impressive comebacks in recent U.S. stock market history. Over the past three months, CVNA stock has risen by almost 64%, eclipsing the S&P 500 (SPY), according to TipRanks' charting data.
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There's no doubt the company deserves credit for this. For the market to have been so wrong about its value over such a relatively short time, and then to regain confidence by delivering a now well-rounded and booming business, has driven the stock to trade at a valuation premium that, in my view, borders on being excessive.
While it's hard to argue against the strong bullish momentum and consistent upward revisions to both top and bottom lines, I do see some structural red flags suggesting the stock might be overpriced at current levels. That introduces a level of instability to the long-term thesis. Despite the stock's rampant appreciation in recent weeks, I remain Neutral on CVNA.
From Near Collapse to Record Performance
When a company loses ~98% of its market value in a short period and still manages to stay alive, I like to think there's something fundamentally resilient or strategic about its operations—something that goes beyond simple market volatility.
That's precisely the case with Carvana. From mid-2021 to early 2022, the company nearly collapsed in the face of a brutal market environment, as the entire automotive sector was hit by the global semiconductor shortage and supply chain disruptions. These issues drove up the prices of used vehicles, while also putting massive pressure on inventories and delivery capacity.
To make matters worse, Carvana was carrying a substantial debt load— approximately $8 billion in net debt in 2022, compared to $3.7 billion today —to fuel its rapid expansion and operations. Back then, it was posting negative EBITDA of $2.1 billion, while today it's delivering positive EBITDA of $1.3 billion. With these operational challenges, its cash flow just couldn't keep up with the mounting interest payments and debt, raising real doubts about the company's survival.
But over the last two years, Carvana's 'resilience' has come from a mix of factors: (1) an innovative business model that reinvented the way people buy used cars by offering a fully digital experience; (2) a strong tech backbone that lets it scale operations fast; and (3) maybe most importantly, a management team laser-focused on tightening operations, extending debt maturities, and securing more sustainable sources of funding.
As a result, Carvana has generated nearly $1 billion in free cash flow over the past twelve months. In its most recent quarter, it reported record results, growing retail units sold by 46% year-over-year and posting its highest-ever EBITDA margin of 11.5%, nearly double the average of around 6% for public auto dealers. The bold goal ahead is for Carvana to achieve 3 million annual retail sales over the next decade while maintaining healthy margins.
The Hidden Flaws in Carvana's Story
After returning almost 100x since hitting its bottom in 2022—and gaining 148% in the last twelve months alone—it seems surreal, but CVNA is finally very close to reclaiming its peak from August 13, 2021.
The main problem, however, as highlighted by famed short-seller Jim Chanos —who still holds a short position in CVNA—is that the market treats Carvana's story like secular growth, when in reality this is a cyclical business.
Not only that, another worrying point is that critics (most notably Hindenburg Research) flag risks tied to 'creative accounting' at Carvana, mainly the fact that its recent profitability relies heavily on selling subprime loans, not just on used-car sales margins. On Carvana's side, the company does officially confirm that it originates and sells subprime loans, profiting from the upfront gain at the time of securitization.
The concern is that these gains are so substantial that they may be artificially inflating operating profit and masking risks, particularly around related parties and credit quality. And arguably, this matters a lot for a company trading at 70x forward earnings, while peers like CarMax (KMX) trade at just 16x.
The issue, in my view, is that as analysts continually revise revenue and EPS estimates upward—in just the last six months, the EPS projection has swung by more than 100%—the market appears somewhat too comfortable in brushing aside the risks behind this model to justify a sizable premium.
Insiders Cash Out, Shorts Step Back
Over the last three years, CVNA stock bears have consistently bet on CVNA's decline, especially at the beginning of 2023 when short interest climbed as high as 54% of the company's outstanding shares.
During that stretch, short interest averaged ~26%, but today, in a clear sign of surrender, only about 9% of outstanding shares remain sold short. To me, that makes the current price even riskier—the bull case looks overpriced, and this low short interest is a dangerous sign of complacency. Not to mention, in my view, the structural bear thesis is still very much alive, with concerns about subprime dependency, questionable accounting, and the cyclical nature of the business.
Another significant red flag is the substantial insider selling by CEO Ernie Garcia III and his father, Ernest Garcia II, who owns approximately 10% of the company. Since May, the Garcia family has sold $515 million worth of shares, in addition to another $1.4 billion sold between last April and November. Of course, insiders sell for various reasons, but they usually buy primarily because they believe the stock is undervalued or expect it to appreciate in value. That clearly doesn't seem to be the case here.
Is Carvana Stock a Buy?
On Wall Street, CVNA stock carries a Moderate Buy consensus rating based on 12 Buy, six Hold, and zero Sell ratings over the past three months. CVNA's average stock price target of $351.50 implies approximately 1% upside potential over the next twelve months.
Carvana's Strong Narrative Mixed with High Expectations and Hold-Worthy Risks
The odds are certainly in Carvana's favor for now. After all, it remains the strongest player—and arguably the disruptor—in a highly underpenetrated industry, with growth projections that aren't inflated but backed by a massive, proven turnaround over the last few years.
However, while some premium is well-deserved, Carvana's business still needs to be treated as cyclical. The risks associated with its financing model and corporate structure—especially given the limited transparency surrounding how earnings are organized—stand, in my view, at odds with the hefty premium the stock now commands.
I don't think it's wise to go outright bearish on a stock with this much momentum and constant upward revisions. Still, I see plenty of risks that are underestimated for anyone leaning aggressively bullish in the long term. That's why, for me, Carvana is a Hold.