Is Carvana's Recent Buy Rating Justified Amid Stiff Competition and High Valuation?

The recent upgrade of Carvana (CVNA) to "Outperform" by Wedbush has reignited debate about the company's valuation and long-term prospects in the competitive online auto retail sector. While the firm's bullish thesis hinges on Carvana's operational progress and disruptive potential, skeptics argue that its valuation multiples remain disconnected from fundamentals. This analysis evaluates whether Carvana's digital transformation and profitability trajectory justify its current valuation or if it remains a speculative play in a market rife with risks.

Wedbush's Bullish Rationale: Growth Potential and Operational Momentum

Wedbush's upgrade to "Outperform" and raised price target of $400 (a 5% increase from its prior target) reflects confidence in Carvana's ability to outperform traditional rivals like CarMax (KMX) and achieve its ambitious retail unit sales targets. Analyst Scott Devitt highlighted Carvana's closing gap in unit sales with CarMax, projecting that Carvana could surpass CarMax's quarterly used unit volumes as early as Q4 2026. The firm also emphasized Carvana's logistics scale, online-first model, and CEO Ernest Garcia's vision for unit growth as key differentiators.

These arguments are bolstered by Carvana's Q3 2025 results, which showed a 44% year-over-year increase in retail units sold (155,941 units) and revenue of $5.647 billion, up 55% YoY. Adjusted EBITDA of $637 million (11.3% margin) and a GAAP net income of $263 million further underscore operational efficiency. Wedbush's optimism is rooted in the belief that Carvana's momentum-driven by its scalable digital platform and expanding inventory-can translate into sustained growth, even amid macroeconomic headwinds.

Market Skepticism: Valuation Disconnect and Structural Risks

Despite Wedbush's bullish stance, Carvana's valuation remains a contentious issue. As of November 2025, the stock trades at a 754% premium on a forward earnings basis compared to its online car retail peers. Its price-to-earnings (P/E) ratio of 73.5x far exceeds the industry average, while its price-to-sales (P/S) ratio of 2.67 suggests investors are paying a premium for growth expectations. Analysts at The Small Cap Strategist argue that Carvana's reported profitability is largely driven by gains on loan sales (accounting for 93% of net income year-to-date 2025), while its core car-selling business remains unprofitable.

Short sellers further reinforce this skepticism. Carvana's short interest of 11.48 million shares (6.31% of public float) has increased by 6.20% since the prior report, with a days-to-cover ratio of 3.6. This suggests lingering doubts about the sustainability of Carvana's financial performance, particularly given its reliance on subprime auto loan sales to third parties-including a suspected related-party buyer affiliated with Cerberus Capital. Additionally, a securities fraud investigation into Carvana's related-party dealings and accounting practices adds regulatory risk to its outlook.

Value vs. Momentum: A Tug-of-War in Disruptive Retail

The debate over Carvana's valuation ultimately hinges on the tension between value and momentum investing. From a momentum perspective, Carvana's 284% surge in 2024 and strong Q3 2025 results validate its position as a high-growth disruptor. Its gross profit margin of 21.2% and operating margin of 9.8% outpace CarMax's 11.8% and 0.6%, respectively, highlighting superior operational efficiency. Wedbush's projection that Carvana could achieve three million annual used vehicle sales by 2033 further supports a long-term growth narrative.

However, value investors remain unconvinced. Carvana's valuation multiples-particularly its P/E of 92.52-far exceed CarMax's 16.95 and Vroom's (VRM) lackluster performance. While Carvana's Sharpe Ratio of 2.04 and Calmar Ratio of 2.12 outperform CarMax's negative metrics, these figures assume continued margin expansion and operational stability. The risks of declining used car prices, rising subprime delinquencies, and regulatory scrutiny could erode investor confidence, particularly if Carvana's growth slows or its loan-sale model faces scrutiny.

Conclusion: A High-Stakes Bet on Disruption

Carvana's recent buy rating from Wedbush is justified by its operational momentum and disruptive potential in the online auto retail sector. Its scalable logistics network, digital-first model, and outperformance of traditional rivals like CarMax position it as a compelling long-term growth story. However, its valuation remains a double-edged sword. While the firm's financials demonstrate improving profitability, the disconnect between its multiples and fundamentals-coupled with structural risks like loan-sale dependency and regulatory uncertainty-suggests a speculative edge.

For investors, the key question is whether Carvana's digital transformation can sustain its current trajectory. If the company can maintain its unit growth, expand margins, and address governance concerns, its valuation may prove warranted. But in a market where momentum can quickly reverse, Carvana's high valuation leaves little room for error. As the 2026 deadline for surpassing CarMax's unit sales approaches, the stock will likely remain a battleground between bullish growth investors and skeptical value purists.