Can the Rally in $CVNA Continue?

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Carvana Co. (Nasdaq: CVNA) is one of the few bright spots in this year's rather dull crop of IPOs. Shares of the stock initially sold off following its first day of trading as investors were wary that its disruptive way of selling used cars (mail order? vending machine?) was more about gimmicks than real sales. But all that changed when the company reported record profits earlier this month. Shares shot up from around $9 to just over $20 in just 2 weeks. Today shares are holding to those highs and now investors are wondering: is this the real deal or will it fall back again?

Carvana Co. is trying to take the Amazon platform to the used car sales industry. You search for your next car online, but it online and finance it online (so far, so But the unique selling points of Carvana are: all cars are certified, there are no dealership markups (saving an average of $2200 per car), the car is delivered right to your door for free, and you have time to test drive it before committing yourself. All of these disruptors have caught media attention and earned the company a lot of buzz.

Let's look at the numbers: at the aforementioned earnings report, the company reported a growth in revenues of 118% to $159M (quarter). Over 8300 cars were sold, with 7700 cars in its inventory. That's not enough yet to turn a profit on its thin margins, but analysts believe it will eventually. The company's own estimates for the annual take is over $900M which is huge, and a full 141% increase over previous estimates, and well ahead of Wall Street estimates. These numbers have earned CVNA buy or strong buy from all but one analyst.

Our take: the momentum off the recent earnings report is so strong, and numbers of the report itself so promising, that we feel there could be a decent bid under this move for weeks to come. By doubling the company's revenues from $450M last year to $900M+ this year, we should see talk of profitability increase. There are 13 public companies in the space and Carvana is the only one not turning a profit. But given how young the company is (founded in 2012), and how much room it has to grow in terms of inventory, and how well liked its platform is by end users, we can overlook this in the hope of its future earnings potential. We give CVNA a "HOLD" for now if already long, and a "BUY" on any dip below $16. Our 1 year price target for shares is $24.

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Posted to Dr. Stoxx Options Letter on Jun 20, 2017 — 12:06 PM
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