Should You Buy the Breakout on Carvana (NYSE: CVNA)?

Carvana NYSE: CVNA, an e-commerce platform for buying and selling used cars, has been one of the biggest pandemic winners in the market.

CVNA has 10x’ed off its mid-March lows, and is trading at nearly double its pre-pandemic (all-time) highs.

Now, after basing between $191 and $225 for most of August, shares kicked off September by breaking out to fresh all-time highs.

Should you buy the breakout? Or has the CVNA rally run its course?

A Wild Two Days Post-Earnings

For Q2, Carvana reported revenue of $1.12 billion and an adjusted loss of 62 cents per share. The revenue came just short of Wall Street’s expectations of $1.14 billion, but the earnings beat expectations of a 79 cents per share loss.

Shares dipped a bit after-hours – not a big surprise for a company that is losing money and trading at more than 7x forward sales.

But what came next was definitely surprising:

Shares reversed the after-hours dip and closed the next day up more than 28%. And then, just one day later, shares gave back nearly half of that 28% gain on a downgrade by Bank of America NYSE: BAC.

Carvana has High Hopes

The post-earnings move – which left shares around 14% higher when all was said and done – shows that investors overlooked short-term struggles and focused on Carvana’s huge long-term upside.

During Q2, Carvana temporarily stopped buying cars from customers while it assessed the impact of COVIID-19 on the industry. This later led to inventory constraints, as used car demand has soared in recent months.

But the number of units sold improved throughout the quarter, with a yoy decrease in early April turning into a 40% increase later in the quarter. Carvana has sold around 200,000 vehicles over the past four quarters, but its goal is “selling two million-plus units per year and to becoming the largest and most profitable automotive retailer.”

There is reason to believe Carvana can pull it off.

Carvana is an Innovative Company that Solves Big Problems

According to a survey by CarGurus, 61% of people now think that buying a car online is a good idea, up from 32% pre-pandemic. On the Q2 earnings call, CEO Ernie Garcia III said, “Suddenly, buying cars online is becoming normalized.”

We covered Carvana a couple of months ago, talking about its innovative “car vending machine strategy.”

To recap, buying a used car is rarely a pleasant experience, as customers are forced to deal with high-pressure salespeople.

Carvana’s service:

• Delivers cars directly to customers’ doors.
• Offers a 7-day money-back guarantee on all of its cars.
• Gives customers the option to obtain financing on the company’s website.

Talk about one-stop shopping!

A Lofty Valuation, But Massive Growth Expectations

Carvana is trading at 7.4x forward sales and EPS aren’t expected to turn positive for the next couple of years.

But the projected revenue growth is making many investors salivate:

In 2020, Carvana is expected to see 33.5% yoy revenue growth. Sales are expected to grow 44.7% yoy in 2021, and then 34.8% yoy in 2022.

The goal of two-million units sold starts to sound a lot more realistic…

Net profit margins are negative but have been improving.

Breakout Didn’t Look Good

In the intro, I mentioned that Carvana broke out to fresh all-time highs yesterday. But I would not buy this breakout for five reasons:

1. CVNA had a slow and listless climb prior to the breakout.
2. Breakout was on average volume.
3. Shares closed well below yesterday’s highs.
4. Overbought on the RSI.
5. Base was less than a month.

You could overlook one – maybe two – of these technical flaws. But all five? I’d pass on CVNA right now.

The best course of action is to keep an eye on CVNA. While it’s not a buy right now, the chart can certainly repair itself and give you the go-ahead in the near future.

The Verdict

If you get into CVNA at $200+ a share, you’re paying a pretty penny.

But in return, you’re getting an innovative company that can realistically take over the used car market.

Carvana can potentially see massive revenue growth well into the 2020s. If the company can also generate solid margins in the long-run, shares would have a lot of upside from here. There is certainly risk with CVNA, but the reward is worth it.