Is the Carvana stock at risk as auto delinquencies jump?

Carvana stock price has pulled back in the past few months as investors worry about the rising delinquencies in the auto loan industry. It also slipped after its earnings missed what analysts were expecting. CVNA was trading at $330, down by 20% from its highest point this year. 

Still, Carvana’s stock is doing much better than it top competitors. CarMax stock has plunged by over 62% from its highest point this year, while Vroom is down by over 55%.

Carvana and the ongoing delinquencies in auto loans

One of the main reasons why the Carvana stock price has pulled back is that recent data shows that more Americans are defaulting on their vehicle obligations. 

A recent report showed that 6.65% of subprime borrowers were about 60 days late on their obligations, the highest rate on record. The soaring delinquency rates explain why Tricolor, a company that offered subprime auto loans filed for bankruptcy recently. 

The ongoing deinquencies are notable because of Carvana’s business model. In addition to selling cars, the company offers financing solutions, which are handled by Bridgecrest Credit Company, which DriveTime Automotive Group owns. DriveTime is owned by Carvana’s CEO dad. 

Therefore, there are concerns that the rising delinquencies will slow its business in the coming months.

Meanwhile, there are concerns about the company’s rising inventories. The most recent result showed that its inventory jumped to $2.3 billion from $1.6 billion in December last year. Soaring inventories could be a sign that the company is not moving its vehicles fast enough. 

There are also concerns about the company’s valuation, which has become stretched in the past few years. Data compiled by Seeking Alpha shows that the company’s forward PE ratio stands at 65, much higher than the industry median of 18. The forward PE based on non-GAAP metrics is 57, also higher than the sector median of 16.

Other valuation metrics show that the company trades at a premium valuation. For example, the forward EV to EBITDA metric has jumped to 21, also higher than the industry median of 15. 

Most importantly, these numbers are higher than those of Nvidia, a company whose revenue is growing by over 50%.

READ MORE: Carvana stock price could crash as risky pattern forms, insiders sell

Carvana revenue growth is continuing

The most recent results showed that Carvana’s business continued doing well in the third quarter. Its retail units sold jumped by 44% to 155,940, while its revenue jumped by 55% to $5.6 billion. This growth makes it the fastest-growing company in the industry. 

Most importantly, the company’s margins are now higher than most auto retailers. Its net income margin rose to 4.7%, bringing its profit to $263 million. 

The company expects that the business will continue thriving in the coming months. It expects that it will sell over 150,000 retail units in the fourth quarter. Also, the management expects that the adjusted EBITDA will be at or above the recent estimate of between $2 billion and $2.2 billion. These numbers may help to justify its premium valuation. 

Carvana stock price technical analysis

The daily timeframe shows that the CVNA stock price has come under intense pressure in the past few months. It has dropped from $413 in July to $330 today. 

Carvana stock moved below the 50-day and 100-day Exponential Moving Averages, which are now about to cross each other. Such a crossover will be a mini death cross, which is a risky pattern.

Therefore, the most likely scenario is where the stock remains under pressure in the near term. If this happens, it will likely retest the key support at $285, its lowest level this month. This target price nearly coincides with the 50% Fibonacci Retracement level.  

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