Is the Party Over for Carvana Stock?
Key Points
Carvana's Q3 EPS miss last week triggered a big sell-off.
Just a few days later, investors are already returning to the stock and its record sales and growth.
While Carvana has had a great year, it's still considered cheap by one key valuation.
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If you based your opinion only on the stock market's short-term double-digit sell-off in reaction to Carvana's (NYSE: CVNA) third-quarter results last week, you might think the best days for the online auto sales leader were behind it -- or at the very least, that some pretty dismal times were ahead of it.
But if you step back, dig into the numbers, look at the industry competition and deep support on Wall Street, you might come to a different conclusion about the Arizona-based retailer's prospects.
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For starters, Carvana came into earnings day riding about a 90% year-to-date gain, and an all-time high hit in July -- far outpacing its auto and retail industry peers. While Carvana's Q3 GAAP earnings per share (EPS) fell well short of analysts' consensus estimate ($1.03 versus $1.32), the miss marked only the first time in 11 quarters that the company delivered a bottom-line disappointment.
Image source: Getty Images.
Historically still cheap?
At the same time, Carvana founder and CEO Ernie Garcia aimed to reassure investors by pointing to record third-quarter revenue (up 55% to $5.6 billion), record retail units sold (156,000, up 44%), as well as nudging its full-year adjusted earnings guidance to be at -- or above -- the high end of its prior outlook.
As for analysts, Koyfin data shows 14 of 22 still rate the stock a buy, with an average 12-month price target of $421, which implies 35% upside.
It's likely no surprise that, given its growth rate, Carvana trades at a premium to its peers and more than twice that of the broader market, with a forward P/E of 56 times expected earnings over the coming year.
What may surprise you, however, is that compared to the past 10 years, that P/E lands Carvana in the fifth percentile, meaning it has traded at a higher multiple 95% of the time. This suggests the stock is historically cheap and that dips are opportunities to add shares.
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Matthew Nesto 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.
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