Is it too late to buy?

From the beginning of 2023, the shares Nvidia (NASDAQ: NVDA) they grew 785% more. The artificial intelligence (AI) boom has taken this business to new heights, and investors couldn’t be more excited about its prospects.

However, one e-commerce stock has skyrocketed more than the AI ​​infrastructure enterprise. Shares of the booming online car retailer Carvan (NYSE: CVNA) they are up 3,270% since the start of 2023, which would have turned $1,000 into nearly $34,000 today.

You might think it’s time to ride the moose to huge returns. But is it too late to buy Carvana stock?

Improving the foundations

To say that Carvana was a struggling enterprise would be an understatement. In fact, the company was literally on the brink of bankruptcy, which was boosted by Carvana’s acquisition of the auction platform ADESA. The management team restructured its debt a year agodecreasing interest payments and extending maturities.

Balance sheet cleanups or management actions that have at least given the company some breathing room have done wonders to boost investor sentiment toward the stock. Short-term uncertainty has been drastically reduced.

Carvana also deserves credit for improving its fundamentals. In 2022, the business reported a 3% decline in volume and net loss widened to $2.9 billion. Revenue and unit volume declined in 2023, but a relentless focus on cost reductions drastically improved the income statement.

While those are minuscule numbers, Carvana posted positive earnings in each of the first two quarters of 2024. The company is also growing again. The stock’s monstrous performance shows that when the market has extremely low expectations, even the smallest fundamental improvements can have a beneficial impact. But Carvana is not out of the woods yet.

Big picture

If we simply ignore the company’s financial picture (Carvana still carries $5.6 billion in long-term debt), it’s clear that Carvana is solving a big problem in the industry. In general, consumers are not satisfied with the traditional car buying process. Buyers have to haggle with a salesperson, deal with a lot of paperwork, and choose from a limited inventory. Plus, it doesn’t help that the whole process can take hours.

This is where the Carvana really shines. Consumers can buy a car and get financing in minutes. And there is a huge number of cars nationwide to choose from. In addition, Carvana offers free delivery on select cars and there is also a seven-day trial period. No wonder the business sold 131% more units last quarter than it did five years prior in Q2 2019.

The story continues

It’s easy to be optimistic about long-term growth prospects, too. Last year, about 36 million used cars were sold in the US, giving Carvana less than 1% market share based on 2023 figures. This is a highly fragmented industry where an online-only platform could penetrate and control a larger part.

But there is competition. There are brick-and-mortar dealerships, many of which are starting to strengthen their digital offerings, and Carvana also has to contend with large-scale car retailers such as AutoNation and CarMax.

Moreover, the ultimate success of the Caravan is far from certain. A lot can go wrong, for example the business again faces financial problems or the economy enters a severe recession. In the last quarter, 67% of operating income went to paying interest expenses, which it doesn’t leave much room for movement.

Pessimism to optimism

At their December 2022 low, shares were trading at a very cheap price-to-sales ratio of 0.025. That multiple has increased to 2.6 today. The rating is no longer convincing, in my opinion. This argument carries more weight when you realize that Carvana remains a risky business to own.

Investors should think twice before buying stocks.

Should you invest $1,000 in Carvana right now?

Before buying shares in Carvana, consider the following:

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax and Nvidia. The Motley Fool has a disclosure policy.

1 Stock That Has Soared More Than Nvidia Since Early 2023: Is It Too Late to Buy? was originally published by The Motley Fool