Carvana Co.'s (CVNA) growth story attracted steady buying interest well before COVID-19 struck in the first quarter, providing the millennial generation with a unique e-commerce platform to buy and sell used automobiles. The pandemic has broadened the company's youthful demographic, inducing older folks and skeptics used to face-to-face haggling with shady salespeople to seek out socially distant ways to trade in the old clunker.

Key Takeaways

  • Carvana price action has carved multiple cup and handle breakouts.
  • The company just raised quarterly guidance.
  • Wall Street analysts expect a loss in the current quarter, despite rapid growth.
  • The stock is trading near an all-time high.

The stock surged higher last week, posting one-day gains of 30%-plus after Carvana told analysts that it expects to achieve third quarter 2020 company records for retail units sold, total revenue, total gross profit per unit, and EBITDA margin. It also expects to report breakeven EBITDA, although it will continue to post a quarterly earnings per share loss. Company revenue grew 13.4% year over year in the quarter ending June 30, missing estimates by a small margin.

Not everyone on Wall Street is impressed by the guidance. B. Riley analyst Lee Krowl downgraded the stock to "Neutral" after the release, noting, "We are downgrading Carvana (CVNA) from Buy to Neutral primarily on valuation with a near-term view that the company's ability to fulfill record consumer demand may be limited due to capacity constraints within the company's reconditioning operations."

The consensus rating now stands at a "Moderate Buy" based upon 11 "Buy" and 6 "Hold" recommendations. No analysts are recommending that shareholders move to the sidelines at this time. Price targets currently range from a low of $105 to a Street-high $265, while the stock opened Wednesday's session just $42 below the high target. This lofty placement could dampen gains in coming weeks because revised guidance has been factored into the numbers.

Capacity is the maximum level of output that a company can sustain to make a product or provide a service. Planning for capacity requires management to accept limitations on the production process.

Carvana Daily Chart (2017 – 2020)

Chart showing the share price performance of Carvana Co. (CVNA)
TradingView.com

Carvana came public at $13.50 in April 2017 and broke out in a strong uptrend in June, lifting into the mid-$20s. It carved a small-scale cup and handle pattern with resistance at that level and broke out once again in April 2018, posting impressive gains before topping out just above $70 in the third quarter. Sellers took control into year end, but price action held breakout support, settling in the upper 20s.

The stock completed another cup and handle breakout in August 2019, but the rally failed to inspire much interest, yielding a shallow uptick that ended at $115 in February 2020. The subsequent plunge undercut the December 2018 low before bouncing in the low $20s, generating a V-shaped recovery pattern that completed a round trip into the prior high in May. Carvana completed a third cup and handle in June, breaking out in an advance that stalled above $200 in August.

Price action has spent the past two months carving a trading range that's close to completing yet another cup and handle pattern. If past is prologue, the stock will break out soon and add to gains, potentially reaching the $300 level prior to year end. Accumulation readings are supporting this bullish outcome, hanging close to new highs, but fourth quarter volatility could upset the advance if election and pandemic anxiety seize control of the ticker tape.

A cup and handle pattern on a security's price chart is a technical indicator that resembles a cup with a handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume.

The Bottom Line

Carvana price action is nearing the fourth cup and handle breakout since April 2018, but fourth quarter volatility could hinder the advance.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.