CVNA - Carvana: The Value And Momentum Trade Is Essentially Over
2024-05-15 07:49:22 ET
Summary
- Carvana's recent 800% stock surge is momentum-and-value driven, now risking overvaluation as market sentiment may outpace realistic growth projections.
- Despite being market-leading, CVNA's operations lack a significant moat to justify long-term premium valuation amid fluctuating earnings.
- As the stock price nears the end of the value opportunity, investors should be wary of a speculative bubble forming around the Company's recent price return performance.
The Market Could Get Ahead Of Itself With Carvana
In the last 12 months alone, Carvana ( CVNA ) stock has grown nearly 800% in price at the time of this writing. After what was definitely a significant value opportunity in late 2022 and early 2023, I believe that the market has the potential to get ahead of itself now and begin to price in unrealistic future growth and sentiment, which is not guaranteed nor indicated by near-term guidance or consensus estimates. I believe that the present price gains have been largely a result of momentum and value investing, and while the company has begun to show positive free cash flow and reported a profit in 2023, investors should be prepared for some moderate turbulence from here on out, especially as the company's free cash flow has not moved linearly in the last 10 years, not has its net income/net loss. I believe that investors should consider that there is a significant amount of potential speculation that could start to be baked into the present price soon, and therefore, not invest heavily at this time and consider selling if holding a stake. From my analysis, I cannot see a substantial moat in operations, but it has a market-leading brand that supports a basic e-commerce platform for cars, a loan system, and vending machines for automobiles, which, while maybe the most innovative of the firm's offerings, is hardly cutting-edge design that will drive massive long-term consumer demand. The primary reason investors seem to be piling in at this time is for short-term gains related to the aforementioned momentum and value, which I will outline more on an FCF basis below. As a long-term investor, this completely contrasts with my ethos of investing in lasting moats, exposing myself to tangible competitive value....
Carvana: The Value And Momentum Trade Is Essentially Over