Carvana: A Compelling Opportunity Amid Market Volatility

Summary

• Carvana’s stock has dropped ~30% from its 2024 peak of $263, now trading at around $195, making it a more appealing entry point.

• The dip follows a short report by Hindenburg Research, but Carvana’s expansion in reconditioning facilities and improved wholesale-retail spreads are driving sustainable GPU growth.

• At ~23x adjusted EBITDA, Carvana’s valuation is more reasonable, and the stock becomes an even stronger buy if it dips into the $150 range.

• Macro factors like incoming tariffs on Canadian/Mexican imports may raise new car prices, shifting more market share to used car platforms like Carvana.

The market dynamics in 2025 are markedly different from those of 2024. Last year, the investment world was dominated by AI and large-cap companies like NVIDIA, leaving little room for under-the-radar opportunities. This year, however, savvy single-stock selection will likely be the key to outperforming the market. With its combination of strong revenue growth, expanding margins, and a now-corrected valuation, Carvana is a compelling pick for investors ready to dig deeper into individual names.

The short report from Hindenburg Research, while impactful in the short term, has created what many might see as a temporary distortion in Carvana’s valuation. While these reports often generate skepticism, the overall reaction from Wall Street analysts has been relatively defensive of Carvana’s position, suggesting that the sell-off may be overdone. The question remains: are short reports a distraction, or do they offer valid reasons to reassess a company’s fundamentals? For Carvana, the long-term outlook suggests the former.

The timing for investing in Carvana is compelling for several reasons. First, the stock’s valuation has undergone a meaningful reset, with its ~30% drop from its peak making the entry point significantly more attractive. At ~23x adjusted EBITDA, the valuation aligns more closely with the company’s expected growth, which analysts project at 17% year-over-year revenue growth for FY25. This revised valuation strikes a balance between growth potential and risk, offering a solid entry point for investors.

Second, macroeconomic conditions are shaping up in Carvana’s favor. Tariffs on Canadian and Mexican imports, expected to take effect soon, are likely to drive up the cost of new cars. This shift could divert more buyers to the used car market, where Carvana holds a significant position. Higher new car prices may also allow used car retailers like Carvana to raise their own prices, further widening the spreads between wholesale acquisition costs and retail sale prices. These dynamics should support continued GPU growth, which has already seen impressive gains in recent quarters.

Carvana’s Gross Profit Per Unit (GPU) is a central measure of its profitability, and the company has made significant strides in improving this metric. In the most recent quarter, GPU rose 20% year-over-year, reaching $7,685. This growth has been driven by several factors, including increased efficiency in retail vehicle sales, stronger performance in wholesale vehicle sales, and contributions from other revenue streams such as loan origination.

The breakdown of GPU for Q3 2024 highlights the company’s ability to drive profitability across its operations. Retail vehicle sales contributed $3,617 per unit, a 26% increase year-over-year. Wholesale vehicle sales added $571 per unit, up 53% year-over-year. While the contribution from wholesale marketplace sales declined slightly, the “other” revenue category—which includes loan originations—rose by 15%, contributing $2,945 per unit.

Loan origination has faced some headwinds, particularly with concerns about auto credit quality among buyers like Ally Financial. However, this represents a smaller portion of Carvana’s overall GPU growth, and the company has demonstrated that its core operations are more than capable of driving profitability. By focusing on economies of scale in its reconditioning facilities and leveraging wider wholesale-retail spreads, Carvana has built a solid foundation for sustainable GPU growth.

At a market cap of $37.59 billion and an enterprise value of $42.44 billion, Carvana’s current valuation reflects a company in transition. Analysts expect Carvana to generate $15.77 billion in revenue for FY25, with adjusted EBITDA projected to grow by 68%. This positions Carvana at ~22.9x EV/adjusted EBITDA, a much more palatable multiple for a company with its growth potential.

The company’s rapid growth in retail unit sales, combined with favorable macroeconomic conditions, sets the stage for continued expansion. With unit sales growing at 34% year-over-year in Q3 2024, and GPU benefiting from higher dealership spreads, Carvana has multiple levers to pull for sustained growth.

For investors, the current price of $195 represents a rare buying opportunity. If the stock slides further to the $160-$170 range, it becomes an even stronger case for adding to positions. The real question is whether Carvana can maintain its momentum in a market that’s increasingly challenging for high-growth companies. Does this valuation correction represent a turning point for the company, or will further challenges emerge? Share your thoughts and join the discussion—what’s your take on Carvana’s prospects in 2025?