We recently compiled a list of the 7 Best Auto and Truck Dealership Stocks to Buy. In this article, we are going to take a look at Carvana Co. (NYSE:CVNA) against the other auto and truck dealership stocks.

US Car and Truck Dealership Market

The auto dealership market is one of the key segments of the greater automotive industry. According to a report by Verified Market Research, the auto dealership industry was valued at $257.30 billion in 2023. The market is forecasted to grow at a compound annual growth rate of 4% to reach $338.6 billion by 2030.

The auto dealership market is a consumer-centric industry, which revolves around customer confidence, inflation rates, interest rates, and the overall regulatory environment. According to a press release by Reuters on July 26, the US car market is facing headwinds due to weak prices, high inventories, and difficulties in logging profits.

The slowed market environment has hit shares of major auto manufacturers and car dealerships nationwide. On top of the macro environment challenges, the market was hit by cyber attacks in June 2024. On June 20, CNN reported that the US and Canadian dealership market stood still due to a cyber attack incident at a data provider called CDK Global. CDK Global data is used by more than 15,000 auto dealers across all major countries. While not all auto dealers use CDK to process orders, those that did faced slower sales growth during the quarter.

As per Reuters, the overall new vehicle sales throughout the US in June 2024 stood at 1.32 million units, representing a seasonally adjusted annualized rate of 15.29 million units during the year. Moreover, affordability also remains one of the key concerns for the market, due to which inventories are not expected to advance as strongly as they did over the past 12 months.

Looking ahead, according to the latest Cox Automotive Dealership report on June 10, the Cox Automotive Dealer Sentiment Index (CADSI) remained stable from the first quarter to the second quarter of 2024. The current market index score for Q2 is 42, which suggests that US auto dealers perceive the market to be weak. For context, the score was 45 a year ago and below the threshold of 50. Moreover, the current market expectation shows a decline in market expectations for the next three months, as the market outlook has dropped from a score of 51 in Q1 to 44 in Q2. The downward trend is attributed to the weaker tax refund season and the ongoing political instability due to elections. To read more about the automotive industry you can look at the 7 Best Small Cap Automotive Stocks to Buy.

Our Methodology

To compile our list of the 7 best auto and truck dealership stocks to buy, we used the Finviz stock screener. We selected Auto & Truck Dealership industry to get a consolidated list of stocks. Next, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge fund holders for each stock.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Carvana Co. (NYSE:CVNA)

Number of Hedge Fund Holders:  43

Carvana Co. (NYSE:CVNA) is an innovative e-commerce platform that facilitates users to buy and sell used vehicles in the United States. What sets the company apart from traditional e-commerce platforms is its ability to leverage technology to enhance user experience. Users of Carvana Co. can research, identify, and inspect the vehicle using a patented 360-degree imaging technology, which essentially gives you a virtual tour of your car. The company also provides financing and warranties on used vehicles and offers scheduled vehicle delivery or pick-up services. Customers can go through a pool of more than 30,000 vehicles at the company’s website and also visit 50-plus auction sites in the US to buy or sell their vehicles.

Carvana Co. (NYSE:CVNA) posted a successful second quarter of 2024 as one of the fastest-growing and profitable automotive retailers in the US. The retail units sold during the quarter increased by 33% year-over-year, reaching 101,440 units, thereby dictating strong customer demand amidst challenging market conditions. The increased retail units sold resulted in the revenue growing by 15% year over year to $3.41 billion. The company also achieved new profitability milestones and reported net income of $48 million and margins of 1.4%. Carvana Co. (NYSE:CVNA) is also focusing on reducing its operating cost and subsequently decreased its SG&A per retail unit sold by $400 and generated a record GAAP operating income of $259 million. The full-year guidance for the company remains positive with adjusted EBITDA between $1 billion to $1.2 billion, indicating a significant increase from last year.

Should you invest in Carvana Co. (NYSE:CVNA)? Here’s the conclusion:

Carvana Co. (NYSE:CVNA) has demonstrated strong performance during the quarter. The company’s revenue has grown at a compound annual growth rate of 33% over the last 5 years. Money managers are bullish on the stock. It was held by 43 hedge funds during Q1 2024 with total stakes worth $3.33 billion. Moreover, 22 analysts hold a consensus Buy opinion on the stock and their median price target of $150 represents an upside of 8% from current levels.

Saga Partners made the following comment about Carvana Co. (NYSE:CVNA) in its second half 2022 investor letter:

I have discussed Carvana Co. (NYSE:CVNA) several times since we first purchased it in 2019 but want to provide an update given the stock’s decline and negative headlines. Historically, Carvana has grown gross profits at a faster rate than operating costs. In 2021, Carvana grew retail unit volumes 74% to over 400,000 cars to become the second largest used car dealer after CarMax. Carvana reached $1.9 billion in gross profits, EBITDA breakeven, and expectations entering 2022 were for continued unit volume growth and scale operating costs.

Similar to Redfin, Carvana has been impacted by pretty extreme industry disruptions/volatility. Supply chain bottlenecks restricted new car production and caused prices to rise. When combined with higher interest rates, car affordability declined and used car volumes crashed.

Carvana plans and hires for expected capacity 6-12 months into the future. Entering 2022 the Company expected to grow unit volumes in the ~30% range year-over-year and therefore faced a cost structure far too high for the retail unit volumes experienced. Since demand has come in below expectations, management is now pursuing cost cuts to get back to EBITDA breakeven.

Overall CVNA ranks 1st on our list of the best auto and truck dealership stocks to buy. You can visit 7 Best Auto and Truck Dealership Stocks to see the other auto and truck dealership stocks that are on hedge funds’ radar. While we acknowledge the potential of CNVA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CNVA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.