Carvana (CVNA-N), the pioneering online used-car dealer known for its iconic car vending machines, is set to make a splashy debut on the S&P 500 index, capping a dramatic three-year turnaround that has seen its market value top legacy carmakers GM (GM-N) and Ford (F-N).
Shares of Carvana jumped 12.5 per cent on Monday to hit a record high, extending their 10-day winning streak. The stock has nearly doubled this year.
Carvana’s resurgence after fears of a debt default and possible bankruptcy in 2022 has followed a so-called K-shaped U.S. economic recovery, where lower-income consumers - squeezed by tariffs and inflation - have headed to used-car lots even as the affluent buoyed new vehicle sales.
“It’s a compelling story. It’s a story that sees huge, dizzying growth post-pandemic and then absolutely collapses. And then that comes storming back again,” said Chris Beauchamp, analyst at IG Group.
“If we expect the Fed to cut rates again, which eases pressures on consumers, there’s still plenty of fuel left in the store.”
Since hitting record lows in 2022, the stock has surged more than 8,000 per cent as the company has touted tighter cost controls, debt reduction and a rebound in demand that helped it swing to profitability.
But in January, short-seller Hindenburg Research said it was short on Carvana, calling its turnaround a “mirage” and claiming its research had uncovered US$800-million in loan sales to an undisclosed related party and manipulated its accounts to fuel temporary reported income growth. Carvana called the report “intentionally misleading and inaccurate.”
The staggering surge in Carvana’s stock has propelled its market value to nearly US$97-billion, above legacy automakers Ford’s US$52-billion and General Motors’ US$71-billion.
Carvana’s stock trades at 57.4 times forward earnings, far above the single-digit multiples of its Detroit rivals.
“It’s a long-term ‘buy’ and I’d use any pullbacks to add for the long-term secular growth story and market share expansion,” said Stephanie Link, chief investment strategist at Hightower Advisors.
The inclusion, announced by S&P Dow Jones Indices late on Friday, will be effective from December 22 and is expected to spur buying from index-tracking funds.
Carvana has been a popular stock among retail traders, who often pile into high-momentum and heavily shorted shares.
“It continues to have a loyal stock following who believe their model can continue to gain market share and improve profitability,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment office.
Its latest string of gains cost bearish investors about US$1-billion in losses, data analytics firm Ortex estimated. The overall short interest sits near the lowest in years as the company’s fundamentals have strengthened.
Carvana sold a record 155,941 retail units in the third quarter, while total revenue surged 55 per cent to US$5.65-billion from a year earlier, the company reported in October.
The company could overtake bigger rival CarMax in quarterly used-car sales volumes by the fourth quarter of 2026, an analyst said in November.