Carvana just had a bear call removed - is this buy time?

If there's one stock that's kept investors on their toes in recent years, it's Carvana Co NYSE: CVNA. A 1,500% rally through August 2021 quickly turned into a 98% drop by the start of this year. Shares then rallied 1,500% again into September before dropping 55% at the start of last month. Do you see a pattern here? It goes without saying that this stock is not for the faint-hearted. 

Carvana is an online platform for used car sales, and as such, its own fortunes tend to follow the ups and downs of the underlying market, hence all this volatility. It also hasn't helped that the company has had its fair share of run-ins with regulators. 

However, for those of us with an iron stomach, it is an interesting stock to watch. Its shares are currently up 60% in the past four weeks, and based on Carvana's history, this could easily be the start of another four-digit percentage run. Already in the past week, it's popped 35%, with one of the key drivers being the rating update from JPMorgan. The team there had the stock rated as Underweight, but on Monday this week upped it to a Neutral rating. While not quite going so far as to call it a raging buying opportunity, it was a significant update all the same and one that caught investors' attention. 

Fresh upgrade

Analyst Rajat Gupta is bullish on the company's overall prospects but remains cautious in the near term. He and his team are of the view that Carvana's strategy in selling used vehicles has given it a significant lead in the online-only sector of a fragmented used vehicle industry. This has allowed the company to grow rapidly, although it has run up large costs that are now starting to impact it. These are compounded by the fact there's been an overall decline in industry volumes due to increased borrowing rates and prices.

Still, they see Carvana's ongoing investments in its infrastructure and network as key pillars in its long-term growth plan and noted as an example their recent acquisition of ADESA's physical auction business. The reality, though, is that traditional brick-and-mortar used car retailers are still highly competitive and have a tendency to be well-capitalized. In addition, the rise in interest rates has put a lid on Carvana's growth prospects for now, but with inflation looking like it's been tamed, this could easily change should the Fed signal the end of the tightening cycle.

It's worth noting that the company managed to beat analyst expectations in its Q3 earnings report last month, with several key metrics shining bright. Their gross profit per unit was up 70% year on year and at a record high, while they managed to deliver a positive adjusted EBITDA for the third quarter in a row. Management noted with the report that they expect a return to profitable growth in the coming quarters, with an ongoing focus on finding operational efficiencies that are already paying dividends despite the challenging macro environment. 

Getting involved

For those of us looking to liven up our portfolios, it's an interesting time to be considering a position in Carvana stock. Wedbush has had the stock rated a full Buy since September, and their price target of $48 implies further upside from here of at least 25%. 

Technically, it's imperative that shares hold onto this week's gains heading into the rest of the month, as this will likely set them up for a run back to the summer's high of $57. This is where the bulls have run out of steam on several occasions over the past two years, but with a series of higher lows underpinning the current run, you'd be inclined to think this is when they're most likely to blow past it. It will be a while before Carvana is back trading in the triple digits, but this week's update and pop-in shares might well come to be looked at as the turning point.