Holding Carvana (NYSE:CVNA) stock now is a dangerous proposition. Sure, it could go higher if there’s an epic short squeeze, but the hype fuel could run out anytime.
At the end of the day, sensible investors should think about whether Carvana’s current valuation makes sense, especially considering the trajectory of used-vehicle prices.
Certainly, Carvana is a leader among used-car dealers. Short-squeeze rallies can be exciting while they last. It’s like a game of musical chairs, though. When the music stops, you might be left standing by yourself, holding a heavy bag with Carvana stock.
CVNA Stock’s Epic Run
CVNA stock has rallied fast and furiously this year, from $4 and change at the beginning of 2023 to nearly $38 in mid-July. Most likely, some short-sellers capitulated along the way, pushing the Carvana share price higher.
History has shown that meme-stock rallies don’t last forever and can end badly. Experts on Wall Street know this, and the average analyst 12-month forecast for Carvana stock is $16.64, implying substantial downside.
I can see why analysts aren’t upbeat about CVNA stock’s near-term prospects. Carvana is a consistently unprofitable business with no price-to-earnings ratio.
The company’s financials are less than ideal, with Wells Fargo analyst Zachary Fadem declaring that Carvana’s balance sheet is “in question” and warning that “positive free cash flow” is “seemingly out of reach” for Carvana.
Used-Car Price Crash Is a Problem for Carvana
Fadem isn’t the only analyst to flash a warning sign about Carvana. JPMorgan analyst Rajat Gupta downgraded Carvana stock from “neutral” to “underweight.”
Moreover, Gupta reiterated a $10 price target on Carvana shares, claiming that the company’s “valuation has once again disconnected materially from fundamentals.”
I agree with Gupta’s assessment. According to the Manheim Used Vehicle Value Index, used-car prices dropped 10.3% year over year in June. That marks 10 consecutive months of year-over-year declines in used-vehicle prices.
If used-car prices are crashing, that’s not going to help Carvana from a financial standpoint. Sure, more cars might get sold, but those cars will generally fetch lower prices.
Ideally, Carvana should aim to sell more vehicles at higher prices, but the current vehicle-market environment won’t likely allow for that.
Despite this, CVNA stock has gone parabolic, with some short-term traders evidently ignoring Carvana’s challenges in search of quick gains.
It’s Too Dangerous to Buy CVNA Stock Now
If you happened to buy Carvana stock at the right time, thank your lucky stars. Also, remember that in the financial markets, greed is what causes many traders to destroy their accounts.
Gupta’s warning is a call for common sense during a time of hype and mania. Carvana is certainly an interesting company, but that doesn’t mean it’s investable. So, don’t be late to the party with CVNA stock; just avoid it for now, at least until the share price normalizes somewhat.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.