A unique environment brings uncertainty to both companies
As earnings season begins in earnest, the market heard from two companies that benefited from the surge in used car demand in 2021. Carvana (NYSE:CVNA) and AutoNation (NYSE:AN) were hoping to deliver reports that would change the fortunes of their respective stocks. CVNA stock is down 63% from its all-time high and 77% from its 52-week (and all-time) high it hit in the summer of 2021. AN stock is down 12.9% in 2022 and is down 23.8% from its 52-week high.
In this article, we’re looking under the hood at these two companies to see which one, if any, may be a recovery play in 2022.
An Uncertain Auto Market
Typically, the new car market is predictable. But in 2021, supply chain disruptions created inventory delays. That meant that used cars were trading at premium prices. That worked in the favor of both Carvana and Auto Nation in the early stages of the pandemic.
Concerns over the supply chain may be dissipating, but inflation pressures including, but not limited to, gas prices along with rising interest rates are fogging the picture. Add to that the fact that consumers are no longer benefiting from stimulus payments and there are legitimate questions as to whether consumers are being priced out of the market.
And here’s where I can’t help but add another wrinkle to this scenario. Normally, if consumers know interest rates are rising (and let’s face it the Fed doesn’t like to surprise anybody), they can pull demand forward and buy ahead of the interest rate increases. But with supply still recovering, there just isn’t enough inventory to meet potential demand.
Carvana May Still Be the Future
Carvana operates on a digital only model. The company markets its platform as a car vending machine. But the takeaway is the same. Consumers can handle the entire car buying experience online. This includes researching and identifying a vehicle, getting financing and warranty coverage, purchasing, and scheduling pick-up or delivery. And every step of the process can be done online, even from a mobile device.
That has loads of appeal. However, after several years of consistently layering one quarter of increasing revenue after another, the trend is reversing. That being said, the company’s revenue still came in ahead of analyst’s expectations.
The same can’t be said for earnings. Carvana is unprofitable and will likely stay that way for quite some time. If investors are looking for a sliver of good news, institutional ownership remains high, but then again so does short interest.
AutoNation May Own the Present
AutoNation maintains a brick-and-mortar present with traditional showrooms. As such, the company sells both new and used vehicles. But the company is pivoting towards a digital model.
And AutoNation also provides a range of products and services include repair and maintenance services as well as wholesale parts and collision services. These services are proving to be highly profitable for the company. In fact, the company reported that revenue from services rose $1 billion which was an 18% gain from the prior year.
And the Winner Is …
I’ll pass on both, thank you. But if I were forced to speculate on either one, I’ll give the nod to Auto Nation. The company has a service component that provides another vertical for revenue. And in addition to that revenue, it comes with high margins.
Analysts disagree with my view and give CVNA stock an upside of 177% as opposed to a 40% upside for AN stock. But I believe that target for Carvana will be coming down. Particularly since the company just announced they will be selling up to $1 billion in shares in part to pay for its acquisition of ADESA, the used-car auction company.
Once again, I don’t plan on investing in either, but if I had to this is a time to go with the predictability of AutoNation.
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