It goes without saying that 2022 has been brutal for growth stocks, but Carvana (NYSE:CVNA) is a name that in particular has been hard hit. Year-to-date, CVNA stock is down 88.5%.
What’s behind this stunning plunge in price for shares in this automotive e-commerce company? Rising interest rates, and their impact on stock market valuations, have for sure played a role. However, it’s not just changing market conditions that have put this stock under severe pressure.
Used vehicle market conditions have shifted from being in its favor, to being out of its favor. As this continues, it’s hard seeing sentiment for shares shifting back anytime soon. Add in the strong chance its losses soar, all while its top-line growth slows down considerably.
No longer in the fast lane, until a clearer picture of its pathway out of its heavy losses emerges, hold off on it.
Why the Market has Hit the Brakes on CVNA Stock
A year ago, Carvana was one of the hottest stocks out there. Today, it’s firmly in the market junkyard. What happened? Put simply, since 2021, the bulk of the hype once surrounding it has been stripped away.
First, even as the used-car bubble began to rage on, the company’s rate of sequential (quarter-over-quarter) revenue growth began to drop. In fact, last quarter, revenue of $3.5 billion came in below the $3.75 billion in revenue reported during the preceding quarter.
Worse yet, this slowdown in growth came with rising costs to boot. Inflationary pressure has squeezed its gross margins. With its gross profits already not enough to cover fixed operating expenses, this has resulted in a big jump in net losses.
For example, last quarter, losses for the period came in at $506 million, more than 6x the net loss reported in the prior year’s quarter ($82 million). All of this has happened just as rising interest rates have compelled investors to move away from their past “growth at any price” mindset, to one that takes valuation more into consideration than before. Putting all of this together, it’s no shock CVNA has taken such a big dive.
Don’t Hold Your Breath on CVNA Stock
Back in 2020, as the pandemic proved to be a boon for this company’s online-only vehicle buying platform, it may have seemed as if Carvana’s high growth would continue, long after the virus ended. In hindsight, it’s obvious the market (as it’s prone to do) overestimated how long it would stay in the fast lane.
With the supply chain crisis still affecting automotive production, it remains a seller’s market for used cars. Even so, this means little in terms of the company’s near-term prospects. Although supplies remain limited, the used automotive space is experiencing demand destruction. Prices have moved too high, pushing would-be buyers out of the market. This points to the company continuing to experience revenue growth deceleration.
Meanwhile, something else that codes badly for CVNA stock remains in play: squeezed margins. Inflation continues to persist, keeping the company’s gross margins at levels too low to cover its aforementioned fixed operating costs. High losses will continue.
Even if further downside may be limited, given how far it’s fallen since 2021, further poor performance will make it near-impossible for the stock to mount much of a recovery. With slim chances of a recovery within a reasonable timeframe, why bother buying?
Bottom Line
Carvana stock earns an “F” rating in my Portfolio Grader. Almost as quickly as shares became “too hot to touch,” the stock has now become untouchable in the eyes of many investors.
Beyond the negative sentiment about the stock, sentiment about the company has done a 180 as well. During the pandemic, many lauded its alternative to the traditional method of buying a used car.
Flash forward to now, much of the discussion is about how it cut many corners to deliver “seamless” car buying to consumers. Issues like car registration problems may impact how many consumers permanently switch to the fully digital method of buying vehicles.
In short, it’s much easier to see the negatives with this stock than the positives. Perhaps down the road, when things in the automotive space normalize, it’ll be worth another look. Yet until then, refuse to take a ride with CVNA stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.