Carvana's 2026 Outlook: Balancing S&P 500 Momentum and Deteriorating Fundamentals

The inclusion of Carvana (CVNA) in the S&P 500 index on December 22, 2025, has ignited a surge in investor optimism, with analysts upgrading price targets and projecting record unit sales in 2026. However, beneath the surface of this apparent turnaround lies a complex interplay of risks that could undermine the company's long-term viability. For strategic investors, the challenge is to weigh Carvana's momentum against deteriorating fundamentals, particularly in its reliance on subprime lending, regulatory scrutiny, and operational vulnerabilities.

S&P 500 Momentum: A Catalyst for Growth

Carvana's inclusion in the S&P 500 is a watershed moment, signaling institutional validation of its business model. Bank of America analyst Michael McGovern has upgraded the stock to a "Buy" with a $455 price target, citing the company's potential to surpass CarMax in units sold by 2026. This optimism is grounded in Carvana's recent performance: third-quarter 2025 revenue surged 55% year-over-year to $5.647 billion, driven by a 44% increase in retail unit sales.

The company's Adjusted EBITDA margin of 11.3% and net income margin of 4.7% further underscore its profitability, with full-year EBITDA expected to reach $2.2 billion.

The broader S&P 500 is also poised for gains in 2026, with projections ranging from a 3% to 16% return, fueled by AI-driven investment, rate cuts, and earnings growth. Carvana's inclusion could amplify its exposure to institutional capital, reducing volatility and aligning its trajectory with the index's upward momentum. CEO Ernest Garcia's ambitious goal of selling 3 million vehicles over the next five to ten years adds to the narrative of scalable growth.

Deteriorating Fundamentals: Subprime Risks and Regulatory Scrutiny

Despite these positives, Carvana's business model is increasingly exposed to systemic risks. The company's loan portfolio is heavily skewed toward subprime borrowers: 44% of its loans are nonprime (credit scores 601–660), with over 80% classified as deep subprime. This reliance on high-risk lending is exacerbated by a surge in auto loan delinquencies, which hit 6.5% in September 2025-the highest in 30 years for that month. While Carvana packages many of these loans into asset-backed securities (ABS) to shift credit risk off its balance sheet, the growing delinquency rates could destabilize the ABS market, triggering broader financial ripple effects.

Regulatory challenges further complicate Carvana's outlook. The company's 99% loan approval rate and a minimum income requirement of just $10,000 per year have drawn criticism for enabling predatory lending practices. Additionally, its opaque ABS structures and potential conflicts of interest-CEO Garcia also runs DriveTime, a loan servicer-have raised red flags. These practices could attract regulatory intervention, particularly as consumer advocates highlight the risks of overleveraged borrowers.

Competitive Pressures and Operational Weaknesses

Carvana's dominance in the used-car sector is also under threat. CarMax and other digital-first competitors are leveraging online trade-in appraisals to capture market share, while traditional dealers struggle to keep pace with inventory constraints. Meanwhile, Carvana's operational metrics reveal vulnerabilities: its cash flow from operations has lagged behind net income, and insider selling has raised questions about executive confidence.

Valuation models further highlight overvaluation risks. A price-to-earnings (PE) multiple of 80.3x far exceeds industry averages, while a discounted cash flow (DCF) model suggests the stock is overvalued by 0.8%. These metrics imply that the market may be pricing in future growth that could be difficult to sustain, particularly if economic conditions deteriorate.

Strategic Investment Risk Assessment

For investors, the key is to balance Carvana's S&P 500-driven momentum with its deteriorating fundamentals. The company's inclusion in the index offers short-term tailwinds, including increased liquidity and reduced volatility. However, its reliance on subprime lending, regulatory risks, and competitive pressures pose long-term threats. A diversified approach-hedging against sector-specific risks while capitalizing on the broader market's upward trajectory-may be prudent.

Carvana's 2026 outlook is a case study in the tension between innovation and instability. While its digital-first model has revolutionized the used-car industry, the sustainability of its growth depends on navigating a fragile financial ecosystem. For strategic investors, the path forward requires vigilance, not exuberance.