Carvana rose past a buy point Wednesday after an analyst upgraded the used-car seller to a buy rating. Carvana is the IBD Stock of the Day.
Jefferies analyst John Colantuoni raised the stock to buy from hold and elevated the target price to 475 from 385. He sees the company gaining market share thanks to more inventory and lower variable costs that offer superior economics and car-buying experiences.
Jefferies' own survey showed that about 30% to 40% of U.S. adults prefer to buy or sell used cars online if priced the same as local dealers. Although Carvana has about 2% of total used car market share, it captures the vast majority of online sales, the analyst said in a note to clients. The company's investments will help expand selection and reduce delivery times and costs, potentially unlocking higher market share.
Fixed-cost leverage is helping "supplement revenue growth, supporting further expansion in unit economics and peer-high EBITDA growth," Colantuoni added.
Jefferies sees Carvana on pace for sales of 157,000 vehicles in the third quarter, or about 45% year-over-year growth. Analysts' consensus Q3 estimate is 149,352 vehicles, according to FactSet.
Carvana Leads Auto Group
Carvana is already the leader in IBD's retail and wholesale auto industry group. Its 98 IBD Composite Rating is the highest of 23 stocks in the group. The company suffered losses for many years but turned profitable in 2023. Analysts polled by FactSet expect earnings to surge 172.1% to $5.24 a share this year, with sales up 38.7% to $18.968 billion.
The company's performance belies weakness in other dealer stocks as some sellers grapple with reluctant buyers. CarMax plummeted 20% on Sept. 25 after quarterly sales and earnings fell and missed expectations.
CarMax CEO Bill Nash told analysts after the report that the consumer "has been distressed for a little while. I think there's some angst." Consumers with better credit profiles appear to be "sitting on the sidelines," Nash added.
The CarGurus used-car price index is down nearly 1% from its peak a month ago, to a current $27,951 average cost. The index is flat year over year.
Stock Tops A Buy Point
Carvana stock climbed briefly above the 396.96 buy point of a cup-with-handle base in early trading Wednesday. Shares had dropped back to slightly below the entry by midday. The relative strength line has a blue dot on its weekly IBD MarketSurge chart, which designates a bullish combination of new highs for the line while the stock is near a buy point.
The stock has soared more than 1,400% from a low in November 2023 and has nearly doubled so far this year. A 45%-deep decline from February to April of this year undercut a previous base, which reset the base count for Carvana. The latest base was a lower-risk second-stage pattern.
Carvana stock has a 21-day average true range (ATR) of 4.22%. The average true range, available on IBD MarketSurge, gauges the characteristic breadth of a stock's behavior. Stocks with a high ATR tend to make large price moves that can trigger sell rules. Stocks with lower ATRs tend to make more incremental moves.
With the S&P 500 and Nasdaq now in a power trend, investors can buy stocks with ATRs up to 8%, though they should not be too concentrated in such stocks.
