Carvana Stock Is Climbing. Time to Buy Into the Hype Ahead of Wednesday's Earnings Report?

Carvana (NYSE: CVNA) is on track to publish its third-quarter results after the market closes on Wednesday, and the stock has been climbing in advance of the report. The company's share price rose 2% in Tuesday's trading. On the other hand, the disruptive used car retailer is still down approximately 8% from the lifetime high that it reached earlier this year even after the recent rally.

Carvana has been, and continues to be, a battleground stock -- and some high profile investors are split on what comes next for the company's valuation trajectory. While short seller Jim Chanos recently published a report highlighting perceived red flags surrounding the stock, CNBC Mad Money host Jim Cramer said that he expects the business to "blow the doors" off expectations with its next earnings report. Should investors pile into Carvana stock ahead of the big Q3 release?

Image source: Carvana.

Is it time to bet big on Carvana ahead of earnings?

Carvana has been one of the market's biggest winners over the last three years, rocketing roughly 2,390% across the stretch as concerns that the company could go bankrupt receded and gave way to stellar sales and earnings growth. Despite its incredible business momentum, the stock has remained controversial.

Along those lines, Jim Chanos, in a recent short report, pointed to defaults, bankruptcies, and increasing delinquencies in the subprime auto-lending space as headwinds that could dent the stock. He also pointed to the collapse of auto lender Tricolor Holdings and raised concerns about Carvana's resilient valuation in light of signs that pressures in the auto market could be rising. Meanwhile, CNBC's Jim Cramer appears to staunchly disagree with Chanos' assessment and expects Carvana to crush Wall Street's expectations with its Q3 report.

With its last quarterly update, Carvana said that it anticipated posting a sequential quarterly increase in retail units sold in Q3. The company also said that it was expecting non-GAAP (adjusted) earnings before interest, taxes, depreciation, and amortization (EBITDA) between $2 billion and $2.2 billion for the full-year period. Meanwhile, the average analyst estimate is calling for the business's sales to increase approximately 40% year over year to $5 billion and its earnings per share to more than double compared to the prior-year period.

On the heels of astonishing business momentum, there's already some strong forward growth priced into Carvana's valuation. Alternatively, the stock actually doesn't look exorbitantly valued in the context of recent sales and earnings momentum and near-term performance expectations.

The company has a highly expandable business model; it still has a huge number of potential territories to launch in; and its margin improvements suggest that it may still be in the early stages of benefiting from economies of scale. The big question is whether the company can continue executing at a high level and avoid industry and business-specific pitfalls that could disrupt its incredible run.

For investors with a high risk tolerance and confidence in Carvana's business momentum, adding shares ahead of tomorrow's earnings report could be a sensible move. But for investors who don't have a very high tolerance for volatility, buying the stock ahead of the Q3 report is probably too much of a gamble.

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.