Why Carvana shares fell 30.1% in January

What happened

Shares of carvana (NYSE: CVNA) fell 30.1% in January, according to data provided by S&P Global Market Intelligence. The e-commerce platform for buying and selling used cars was downgraded due to futures expectations for its end market and was hurt by the sharp drop in high-growth stocks last month.

So what

There was no major financial news released by Carvana in the past month (although it just announced it was doing a Super Bowl commercial), with earnings released Feb. 24. However, with so much news around the used car industry, investors have gotten nervous about the company’s prospects. Used car prices have skyrocketed since the start of the pandemic, creating much of the inflation we are currently experiencing in the United States.

Image source: Getty Images.

This has been good for Carvana’s gross margins, but the lack of used car inventory across the country has the potential to hurt Carvana’s overall sales. That’s likely why the stock is down 50% in the past six months, as investors believe revenue growth could slow in coming quarters unless used car stocks come back. to normal. It should be noted that although this appears to be speculation within the investment community, so far it has not materialized in Carvana’s business. Last quarter, Carvana posted revenue of $3.48 billion, up 125% year-over-year.

In addition to the used car market, Carvana sold off with the declines in high-growth stocks last month. the iShares Russell 1000 Growth ETF was down about 10% in January. This widespread decline added more fuel to Carvana’s share price decline.

Now what

With Carvana shares down 50% in the last six months at $150 per share, the shares now have a market capitalization of $26 billion. Over the past 12 months, the company has generated $10.9 billion in revenue and $1.66 billion in gross profit (it does not generate positive net profit). This gives the stock a price-to-sales (P/S) ratio of 2.4 and a price-to-gross earnings (P/GP) ratio of 15.7.

The low P/S might make you think Carvana stock is cheap right now, but with such low gross margins which can be inflated with used car prices, the stock still isn’t good. market even after this 50% drop.

That doesn’t mean you should avoid buying Carvana stock, because while it can continue to grow triple-digit revenue, that high P/GP will likely decline rapidly over the next few years. But the stock isn’t cheap no matter where its price was six months ago.

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Brett Schafer has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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