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There’s no getting away from it. Carvana has rallied from the brink of oblivion to become one of Wall Street’s most impressive performers in 2023. But as a new year beckons, can the used car firm steer clear of a timely reality check?

With growth of almost 1,000% throughout the 2023 calendar year, Carvana (NYSE: CNVA) has been a breath of fresh air for investors during a widespread market recovery dominated by generative AI. 

Rather than relying on emerging technology, Carvana innovated its way through America’s troubled post-pandemic used car market to thrive as supply chain issues impacted drivers in need of a vehicle. 

As consumer demand for used cars grew, Carvana’s operating model, which focuses on buying cars through consumer and wholesale channels before selling them within 70 days has enjoyed a significantly larger market. 

However, as economic headwinds and supply chain issues sparked by the pandemic begin to wane in 2024, is Carvana’s newfound $10 billion market capitalization and $50 share price sustainable?

Charting the Rise and Rise of Carvana

Throughout the year, Carvana has consistently defied expectations among market analysts. In recent weeks, the stock was dealt another boost as JPMorgan upgraded CVNA to neutral from underweight, boosting its price target by 60% to $40 from $25. 

The appraisal came as the bank highlighted Carvana’s progress in terms of productivity, costs, and operating culture. 

Carvana’s outperformance is further highlighted by its recovery from sharp losses throughout late 2021 and 2022. Today, the stock has managed to overcome even JPMorgan’s predictions to rally towards $50. 

However, the analysts also highlighted that higher interest rates and Carvana’s push to pause investments to manage profitability may subdue volume growth in the near future. 

One key factor that had driven Carvana’s growth in 2023 was the stock’s popularity with meme investors. With some analysts predicting bankruptcy for the embattled Carvana stock off the back of a tumultuous 2022, CVNA became the seventh most trending stock in July of last year and experienced a short squeeze as a result of meme investors seeking to defy institutions shorting the stock. 

It’s worth highlighting that Carvana’s strong performance throughout the year is down to far more than meme investors. The firm worked tirelessly to resolve its debt concerns and completed a debt exchange program in which $5.52 billion unsecured notes were changed for cash and new secured notes in a move that lowered Carvana’s outstanding debt by over $1.32 billion. 

More optimistic investors may see future opportunities for Carvana should the Federal Reserve begin cutting interest rates over the coming months in a move that can help the used car company lower its variable debt payments and boost vehicle demand. 

Could Sentiment be About to Turn?

Despite its positive outlook from JPMorgan, evidence of sensible management, and the support of meme investors, analysts have begun to turn their attention to the sustainability of Carvana’s ongoing rally. 

Maxim Manturov, head of investment research at Freedom Finance Europe, notes that Carvana’s impressive surge throughout 2023 “suggests a potential overvaluation.”

“The high valuation lacks support from fundamental indicators, and the company faces challenges such as rising interest rates, supply chain disruptions, and increased competition,” Manturov warned. 

As 2024 appears set to herald lower interest rates and a rebound in used car demand, we may be seeing Carvana share prices reflecting the expectation of an upcoming market revival. However, if economic headwinds impede the used car market further in 2024, momentum may favor short sellers more in the new year. 

Learning From the Present

With such impressive growth, it’s fair for investors to look out for a trend reversal in Carvana’s stock. But is there any sign of CVNA running out of steam? 

The company’s third-quarter earnings in 2023 were far from perfect for Carvana, with total revenue falling 18% year-over-year, while used car sales ebbed and flowed throughout the calendar year, dipping to 76,530 units in Q2 but rising to 80,987 units by Q3. 

With decision-makers cutting selling, general, and administrative expenses by over 34% to $433 million, it’s clear that despite its net income of $741 million, Carvana is seeking to prioritize the management of its debts for the foreseeable future. 

What does this mean for 2024? The impressive 1,000% growth experienced by Carvana will likely cool in the new year as the stock’s performance will rely heavily on factors such as interest rates and consumer appetite for used cars. 

The sustainable approach adopted by the used car firm means that investors should be confident that there will be no nasty surprises ahead for CVNA holders. 

The lingering question for investors revolves around how heavily a used car market rebound is factored into 2024, and whether there’s any room left for the stock to rally should Carvana see a rise in consumer interest buoyed by Fed interest rate cuts in the year ahead. The answers here could be decisive in understanding Carvana’s future performance.