The Zhitong Finance App learned that the Carvana (CVNA.US) business model of buying and selling cars online has resonated with investors. The stock's recent rise has been overwhelming. After the Q3 earnings report was released on Thursday, it continued to gain full steam. At one point, it rose 25% to a record high of 259.39 US dollars. As Carvana continues to climb into the overbought region, investors have to consider risk thresholds, and analysts are cautious about the rationality of its valuation.

The used car retailer announced its third-quarter earnings report on Thursday, ushering in another record quarter. Car sales increased 34%, revenue increased 32% to 3.66 billion US dollars, higher than the estimated 3.45 billion US dollars, and profit per share reached 0.64 US dollars, higher than the estimated 0.17 US dollars. Carvana expects sales to exceed 34% in the fourth quarter, and the adjusted earnings before interest, tax, depreciation and amortization (EBITDA) for FY24 will be “significantly” above the upper end of the $1 billion to $1.2 billion range, all in what is seen as a challenging environment in the automotive industry.

The company currently has enough real estate to support more than 3 million retail cars a year, and refurbishes cars closer to customers to improve unit economic efficiency by reducing inbound and outbound transportation costs.

CEO Ernie Garcia said during the company's earnings call that “our moat hasn't been dug yet,” and he detailed that investment in infrastructure will grow “far beyond its current scale.”

J.P. Morgan's Rajat Gupta (Rajat Gupta) and Ryan Brinkman (Ryan Brinkman) said: “The third quarter results should be viewed as a liquidation event that may dispel any concerns or doubts about the company's recent progress in the unit economy, which is mainly focused on expanding the river of escort with peers.” They added that Carvana's debt restructuring in 2023 made it “a more profitable and more flexible company.”

Furthermore, accelerating sales growth while advertising is flat, indicating that the company still has room for improvement. The company plans to increase ad spending by 5 million to 10 million dollars in the current quarter, which is usually a period of sluggish automobile sales.

John Colantuoni and Brent Thill of Jefferies said, “Despite stable advertising and relatively stable inventory levels, we were also deeply impressed by the fact that Carvana was able to achieve sales growth of more than 30%, which shows that the company still has a lot of room to grow in market share.”

Over the past six months, Carvana's stock price rose by an astonishing 177%, while the S&P 500 index rose 14%, while its closest competitor, KMX.US (KMX.US), rose only 10%. Seeking Alpha analyst Dave Kranzler (Dave Kranzler) said the stock price seemed “ridiculously overvalued.” He believes that the impending default, the debt restructuring that essentially delays the debt burden for two years, and the stricter underwriting standards of its financing partners will weaken Carvana's valuation.

“We believe [the current valuation] has little room to rise,” Piper Sandler's Alexander Potter (Alexander Potter) agreed and reiterated his neutral rating, adding, “The historical beta value misrepresents Carvana's true risk profile.”