Carvana's 2025 Rally Just Got Another Catalyst: S&P 500 Inclusion

Carvana (NYSE: CVNA) shares jumped a significant 12% on Monday, fueled by the news of its inclusion in the S&P 500, bringing its year-to-date gains to 125%.

The online used car retailer underwent key changes in operational efficiency and financial management in 2023, resulting in the stock surging an astounding 9,540% since January 2023.

What's the benefit?

Carvana's inclusion in the S&P 500, a highly regarded index, triggered passive funds and ETFs that track the index to buy its stock. As a result, Monday saw a trading volume of 14 million shares, a significant jump from its average daily trading volume of 3.3 million shares.

A notable benefit of this inclusion is lower volatility over the longer term, as passive index-tracking funds, which manage trillions of dollars, tend to be stable. However, in the days leading up to the effective inclusion in the S&P 500, on Dec. 22, investors should expect greater volatility as funds scramble to include the stock in addition to front-running trades.

In lay terms, the primary advantage of inclusion is access to higher levels of institutional capital, which results in lower exposure to retail-investor-driven momentum.

A turnaround that deserves attention

Better operational practices and a reduction in net debt have driven Carvana's recovery. Its gross margin saw a substantial increase, jumping from 5% at the close of 2023 to almost 20% in the third quarter of 2025. Net debt, which peaked at $8 billion at the end of 2023, has now decreased to $3 billion. These two factors have helped to revitalize the stock.

Image source: Getty Images.

In the third quarter, Carvana sold nearly 156,000 retail units (vehicles), representing a 44% year-over-year increase. Total revenue grew even faster, at 55%, thanks to higher average unit selling prices. CEO Ernest Garcia has set an ambitious target of selling 3 million vehicles over the next five to ten years, a goal he believes is achievable.

Gross profit per unit (GPU), however, declined by $77, while wholesale GPU decreased by $168, owing to higher depreciation rates for used vehicles.

Should investors buy the stock?

There are, however, a few concerns that investors should be aware of. First, the vast majority of car buyers at Carvana are subprime borrowers. That opens up the risk of default and insolvency if an economic crisis comes along.

Second, insiders have sold a significant amount of stock over the past few days. Since Nov. 1, insiders have sold $51 million worth of stock. Which leads to the question: Is the stock overvalued?

Possibly. At 68.5 times forward earnings, the stock doesn't appear cheap. The market may have been overly exuberant in ignoring the risks associated with subprime borrowing.

Third, growth in cash from operations has been lackluster compared to the increase in the auto retailer's net income. This could mean a delay in converting subprime loan receivables into ready cash.

Ultimately, it's a loan-dependent business model, and the first casualty will be the rich valuation in case things turn south.

Isac Simon 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.