Is Carvana's Bumpy Ride Finally Over?

If you've ever driven past one of Carvana's (NYSE: CVNA) car vending machines and thought, "That can't possibly be a real business model," you're not alone. After skyrocketing during the pandemic and then crashing just as hard, the stock became a cautionary tale for growth-at-any-cost investing.

But its bumpy ride might finally be smoothing out. Recent tariff changes are making new cars more expensive than used ones by a large margin, and the company's artificial intelligence (AI)-driven pricing system appears to be delivering real profits. Its recent record-breaking quarter could be the sign investors have been waiting for that now is the time to shift gears and buy into Carvana.

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New tariffs, new traffic

When the White House imposed a 25% tariff on imported vehicles and critical components earlier this year, car manufacturers started to panic. As a result of the original tariff announcement, average new car prices jumped 2.5% in April alone. The only other time in the last decade we've seen that kind of jump? April 2020. At that time, Carvana stock went on a run for the next 21 months.

Prices for some new car models are now expected to rise another 10% to 15% by summer. When the tariffs were announced, many buyers rushed to lock in pre-tariff deals on new cars, tightening supply and pushing used car prices up. Now with new cars increasingly unaffordable, more buyers are turning to used vehicles, giving Carvana a clear path to take over the competition.

AI is fueling Carvana's profit surge

But recent tariffs aren't the only reason Carvana is starting to look like a well-oiled investment machine. Prior to the recent AI boom, Carvana was already building a business model designed around a fully digital buying experience. Its tech-forward approach made it easy for people to shop without the dealership markup or hassle. Now, it's incorporating AI well before its competitors can catch up.

Carvana has built one of the most sophisticated pricing engines in retail. Its system makes thousands of real-time pricing adjustments each day across its entire inventory, fine-tuning the price of every vehicle individually based on live market data. That efficiency has paid off big: In Q1 2025, it posted a record quarterly net income of $373 million. Total revenue jumped 38% year over year, and units sold increased 46%.

Perhaps more importantly, its gross profit per unit hit an all-time high of over $6,900, a 7.9% increase and a sign that Carvana isn't just selling more cars -- it's making more money per deal. These numbers demonstrate that the recent stock growth isn't just an outlier in response to volatile headlines. Its economics and algorithms firing on all cylinders together.

Zooming past the competition

But Carvana's not the only used car lot in town, so what makes it a better bet for investors than its competitors? Carvana's 8.8% profit margin significantly outpaces CarMax's 1.5% margin in its 2024 Q4 results, showcasing a clear edge in operational efficiency.

And after Vroom exited the online automobile retail industry in 2024, Carvana now stands as the only national online-only used auto retailer. This, combined with a leaner structure and greater automation, allows the company to keep costs lower than traditional dealerships.

This proprietary pricing software holds another potential growth opportunity beyond direct up-front profits. Its advanced system could one day be licensed out to other dealers, opening a new high-margin revenue stream.

Meanwhile, its national reach remains a standout. With 40 car vending towers across the country (Fun fact: The tallest one is 12 stories tall and located in Nashville), home delivery options, and an end-to-end logistics network, Carvana can achieve coast-to-coast scale without the costly overhead of a sprawling dealer footprint.

But don't ignore the check engine light

But Carvana is no sure thing. Over the last few years, it's had more ups and downs than a used Jeep's suspension, so it's wise to take a detailed look under the hood before racing to buy.

One of the biggest concerns remains the company's debt load. Long-term liabilities sit at $5.7 billion, while cash on hand is only $1.9 billion. While debt is down 4.35% year over year, if interest rates rise or vehicle sales drop, that burden could become a major drag on cash flow.

There's also policy uncertainty to factor in. If current tariffs are reversed or foreign governments retaliate with tariffs of their own, the pricing advantage Carvana enjoys could vanish.

So is Carvana worth a test drive?

Carvana has come a long way from the days of burning cash and missing delivery deadlines. It's now using AI to drive profits as rising tariffs on new cars steer more buyers right into its lane. The company has pulled off a stunning turnaround, and for investors who believe in the power of digital transformation, Carvana might just be worth a test drive.

Year to date, shares are up over 70% and still trading below their all-time high, so there's still time to jump in. I would recommend investing in Carvana only to those who are ready to buckle up, as this stock may come with some twists and turns.

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Philippa Main has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CarMax. The Motley Fool has a disclosure policy.