Carvana's Profitability Concerns Are Driving Down the Stock. Should Investors Buy the Dip?

Carvana (NYSE: CVNA) published its fourth-quarter results after the market closed after the market closed on Feb. 18, and the stock has seen rocky trading following the report.

Carvana posted sales of $5.6 billion, beating the average analyst estimate by $330 million. Revenue was up 58% year over year in the period, and vehicle sales were up 43% compared to the prior-year period. Meanwhile, earnings per share of $4.22 crushed Wall Street's call for a per-share profit of $1.13. But while core earnings came in significantly ahead of expectations, performance along another profitability metric has caused the stock to lose ground.

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Should investors pounce on Carvana after recent pullbacks?

As of this writing, Carvana stock is down roughly 12% since publishing its Q4 results. In addition to disappointment surrounding the Q4 report, the company's valuation has also been pressured by geopolitical and macroeconomic concerns stemming from escalating conflict in the Middle East.

Carvana posted non-GAAP (adjusted) earnings before interest, taxes, depreciation, and amortization (EBITDA) of $511 million in the fourth quarter. Meanwhile, the average analyst estimate had called for the business to record adjusted EBITDA of $535.7 million. With that performance, the company's adjusted EBITDA margin of 10.4% in the period fell meaningfully short of Wall Street's target for an adjusted EBITDA margin of 10.4%.

Carvana's Q4 report came on the heels of a new short report on the stock published by Gotham City Research. In the report, Gotham alleged that Carvana had been overstating its earnings using related-party transactions connected to businesses owned by the family of CEO Ernie Garci III. In particular, the short seller singled out Carvana's reliance on DriveTime Automotive Group for vehicle servicing and some administrative functions. The report also raised concerns about Bridgecrest Acceptance and the role that the business plays in facilitating loan financing for purchases through Carvana.

Ernie Garcia's father, Ernest Garcia II, owns both DriveTime Automotive and Bridgecrest Acceptance. Ernest Garcia is also Carvana's largest shareholder. While these connections don't necessarily indicate that Carvana is doing anything untoward with its accounting practices and related party transactions, the dynamic has been a consistent point of concern among some investors.

In addition to the adjusted EBITDA miss and ongoing uncertainty related to the validity of related-party transaction concerns, the forward guidance Carvana issued with its fourth-quarter report was also somewhat short on details. While the company said that it remained committed to the core strategic principles that supported strong sales expansion last year and additional profit-driving initiatives, management's broad comments calling for growth in retail units and adjusted EBITDA in 2026 lacked specificity. With these factors in mind, I would wait for additional pullbacks before jumping into the stock.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.