Carvana Exits Oversold Territory, Labeled ‘Apex Predator’

Carvana (CVNA) is an online car dealer and financier in the United States.

The company is touted as the fastest-growing presence in the industry, meaning that its stock has been subject to much debate. I am bullish on the stock.

Morgan Stanley’s Optimism

Morgan Stanley analyst Adam Jonas is impressed with Carvana amid a renewed risk/return profile. 

According to Jonas: “We see CVNA at under $140 as a better risk/reward today than when the stock was at $40 2 years ago, as we believe it has only solidified its moat/competitive advantage in recent years and remains the apex predator in auto retail.”

Jonas is spot on with his analysis. Carvana has managed to reduce its short-term debt by 49%, suggesting a more robust business model. It’s usually a sign that creditors have more confidence in a company when there’s a shift in weighting from short-term borrowings to long-term debt; this should be considered as a big plus by investors.

Furthermore, Carvana has continued to grow its top-line revenue. The company has achieved 125.39% in year-over-year revenue growth, suggesting that it’s dominating in terms of market share.

No Longer Oversold

“Buy the dip” has turned into a bit of a fad recently as investors have joked about the market’s resilience over the past two years.

Carvana could possibly be considered a real “buy the dip” opportunity. The stock has drawn down by more than 50% during the past year, causing it to trade below an RSI of 30.00 for much of the time, which is considered oversold.

The stock has breached through the oversold bounds and now holds an RSI of 39, suggesting that we could be at the start of a reversal pattern.

Valuation

Carvana stock’s valuation multiples are trading below their historical values, conveying that the stock is undervalued.

The stock’s P/S and P/B ratios are trading at discounts worth 24.2%, and 18%, respectively. There’s no guarantee that valuation multiples will revert to mean, but it’s certainly a good indicator to use in the context of the broader argument.

Wall Street’s Take

Turning to Wall Street, Carvana has a Moderate Buy consensus rating, based on 10 Buys and four Holds assigned in the past year.

The average Carvana price target of $280.91 implies 105.6% upside potential.

Concluding Thoughts

Carvana could be set for a reversal due to a more robust balance sheet and the fact that the stock has been severely oversold during the past year.

The stock is trading below fair value, which could see investors change their narrative moving forward.

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