With the major indices hitting fresh all-time records, investor optimism appears higher than ever before. This has created a favorable environment in which some of the most volatile stocks are soaring.
Just look at Carvana(NYSE: CVNA). Shares of the used car online retailer are up more than tenfold in just the last 12 months. Instead of buying the stock to maybe ride the momentum for near-term gains, the best perspective may be to think long term.
With that mental framework, let's consider: where will Carvana be 10 years from now?
Providing context
Before figuring out the stock's possibilities, I want to mention that I still view the business as an extremely risky investment opportunity. To its credit, Carvana impressed shareholders with its latest financials, which showed lower expenses and an annual profit in 2023.
However, the company still carries a sizable debt burden. And perhaps even more discouraging, Carvana depends heavily on robust macroeconomic conditions for its success, like what's happening with interest rates, supply chains, or consumer confidence. These are outside of its control.
This just means there is a lot of uncertainty as we set our sights on the future. The biggest worry is how the business would navigate any possible recessionary periods.
If all goes right
For the sake of this discussion, let's just assume that everything goes right for Carvana over the next decade. In this optimistic scenario, how could the stock perform for investors?
Carvana sold 313,000 cars in 2023, up from just 2,100 nine years ago. Given that there were 36 million used vehicle transactions in the U.S. last year, Carvana has less than a 1% market share. There is a ton of room to grow.
As the business continues investing to expand its logistics footprint, unit volume can keep rising. Carvana prides itself on providing a superior user experience that's much better than the traditional setup, where cars are sold at physical dealerships. A younger, more digitally savvy demographic can also help support demand.
In the past five years, revenue increased at a compound annual rate of 40.7%. It's anyone's guess what the growth rate will be in the future. But let's just say Carvana can capture 5% of the total market by 2033. That would imply an annual unit volume of 1.8 million cars -- nearly six times higher than 2023's total.
At this level of scale, it's not unreasonable to assume that the business will be able to consistently produce positive earnings, something that has been elusive historically, even though Carvana did report a net income of $150 million last year. In fact, management has set a long-term target of achieving an EBITDA (earnings before interest, taxes, depreciation, and amortization) of between 8% and 13.5%. That would be drastically better than the 3.1% margin posted in 2023.
Too much uncertainty
After its recent surge, the stock trades at a current price-to-sales ratio of 1.1, just above its historical average but well below the peak valuation during the 2021 bull market. Should Carvana be able to penetrate its market opportunity further while also driving improved profitability, I'm certain the market will reward it with a higher multiple.
Ten years from now, this stock could be a massive winner. But as I noted earlier, a lot of things need to go right for this to happen. Based on the situation today, there's simply too much uncertainty. And this forces me to pass on buying the shares despite what could be huge upside.
Should you invest $1,000 in Carvana right now?
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Neil Patel and his clients have 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.
