• Carvana shares have gained over 50% in the past half-month, following its quarterly reports and the announcement of the stock’s inclusion in the S&P 500.
• Marquee analysts have initiated coverage on the stock, with the majority of Wall Street recommending it as a buy. 
• Some analysts and retail investors have raised concerns due to flat industry growth, the inconsistent stock move of peer CarMax, and past allegations of accounting fraud against Carvana. 

Carvana’s stock is on a dream run ahead of its inclusion in the S&P 500 index on Dec. 22, but analysts and retail investors are viewing the rally with a tinge of skepticism. 

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The online car dealership’s shares have gained for 12 consecutive sessions — their longest run on record — rising over 50% cumulatively. At a record-high stock price, the company hit a valuation of $101.7 billion. The S&P on Dec. 5 announced its upcoming quarterly rebalancing, which would also include CRH (CRH) and Comfort Systems USA (FIX).

Doubts Linger

The rally is not surprising, given that a spot in the benchmark index exposes the stock to a much broader range of investors; however, there are doubts. Bank of America analysts are "slightly skeptical" about Carvana ultimately being added to the index and believe the stock's rally amid flat industry growth underscores its "idiosyncratic growth potential," according to their investor note summary on The Fly.

BofA, however, maintained its ‘Buy’ rating on CVNA and raised its price target to $455 from $385. Morgan Stanley and UBS recently started covering Carvana, also with ‘Buy’ ratings. 

Carvana, which competes with CarMax, is the pioneer of online auto sales and has enjoyed substantial growth over the past year as U.S. tariffs prompted consumers to turn to auto deals and used cars. 

But a few points raise concerns: subprime auto lending has surged, auto-related players, First Brands and Tricolor Holdings, have filed for bankruptcy, and insiders — including CEO Ernest Garcia III and his father, Carvana chairman Ernest Garcia II — are selling shares at a rapid pace.

The now-defunct Hindenburg Research accused the father-son duo of accounting manipulation earlier this year. Following the report, a group of law firms launched an investigation, though no lawsuit has been filed to date.

Carvana’s revenue and net income have risen at a much faster clip than those of its peer CarMax over the past several years. Carvana stock now trades 68.5 times the company’s forward 12-month earnings, according to Koyfin, while Carmax trades at just 18.5x.

Retail View

Notably, Stocktwits sentiment for CVNA dropped as the stock rallied this month and was ‘bearish’ as of the last reading. 

“Garcia dumped $1.4B this year alone, same playbook as 2021 before it cratered 99%. Welcome to the Circus, short position started today, holding this short till $200,” said a user. Carvana stock lost 98% in 2022, as the company’s business declined and it racked up debt. It completed a debt restructuring the following year.

Another notable sign is that CarMax stock is trading in reverse, down 50% year-to-date, though that’s partly because of its weak performance and the CEO departure announced last month.

If proven guilty of financial manipulation, Carvana could be dropped from the S&P 500, another Stocktwits user speculated. “This is a scam sandwich, wrapped up in fraud foil and served up on a pump and dump plate,” another user said, describing the mood. 

Most Wall Street analysts are unfazed at the moment. Eighteen of the 25 covering Carvana’s stock recommend ‘Buy’ or higher, six suggest ‘Hold,’ and only one rates it ‘Sell,’ according to Koyfin. However, their average price target of $432.30 is significantly below the current last closing price $467.8.

CVNA stock was trading 1% lower in Thursday’s premarket session. As of the last close, the stock has gained 130% year-to-date.

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