Carvana Co. (NYSE: CVNA) is one of the best-performing retail stocks in 2024, up more than 230% as markets closed on September 24, 2024. This continues a run that started in late 2023 that has sent the stock up by more than 317%. The company is known for its “vending machine” approach to car buying that has been disruptive to the traditional used car buying process.  

In the last two quarters, the company has returned to growth, albeit with unit sales growing more than revenue. This suggests that consumer demand remains strong, albeit perhaps at lower price points.   

So, if lower interest rates bring down interest rates as expected, then the sky’s the limit for CVNA stock, right? That’s what the conventional wisdom may say, but analysts aren’t so sure, with some believing that all the growth in CVNA stock is already priced in.  

The Carvana analyst forecasts on MarketBeat have a consensus price target of $153.88, which would be a 10.4% pullback for the stock. However, in September, three analysts reiterated or increased their price targets for CVNA stock at levels far above the consensus price, with the highest coming in at $200.  

Lower Interest Rates May Stimulate Pent-Up Demand 

Used car prices have come down, but they can’t go low enough to spark demand from consumers who have two concerns. First, they’re still dealing with inflation in their daily lives. This is particularly true for low- and middle-income consumers.

As noted above, bulls will point out that in Carvana’s July 2024 earnings report, the company showed unit sales rising more than revenue and a higher profit per vehicle sale than its competitors. The company did post earnings per share of 14 cents, which beat expectations by 14 cents.  

However, this shows that Carvana was selling lower-priced cars and, more than likely, to consumers with damaged credit. That leads to the second investor concern. Many of these consumers, and certainly lenders like Ally, are concerned about the safety of their jobs.  

Ally Warns of Rising Auto Loan Delinquencies, Impacting Carvana

Most used car dealers rely on third parties to buy their auto loans. Carvana's largest partner is Ally Financial Inc. (NYSE: ALLY), which has agreed to buy $4 billion of Carvana receivables. That buying activity began in January 2024 and runs through January 10, 2025.  

However, in September, Ally warned that loan delinquencies in retail auto sales were rising, including late-stage delinquencies (those longer than 60 days). This is the first step towards repossession, and Ally forecasts that the situation will only worsen. Remember, these loans come with a fixed rate, so current borrowers won’t get relief from lower rates.  

The loans themselves don’t pose a risk to Carvana. But if the situation doesn’t improve, Ally will demand better terms on future loans, which will eat into Carvana’s margins and, ultimately, its earnings.  

The Cost of Growth Doesn’t Allow for Selectivity 

Investors should also bear in mind that Carvana continues to pay down the debt that fueled its growth. In the last quarter it had $5.4 billion in long-term debt and servicing that debt will eat into the company’s free cash flow.  

It’s true that lower interest rates will help reduce the cost to service that debt, but the need to pay down that debt also means that Carvana can’t be that picky when it comes to its customer base. That means it has to try to sell to consumers who may have a higher credit risk even as the risks of lending to those borrowers continue to grow.  

Let History Repeat Itself With CVNA Stock 

The growth in CVNA stock hasn’t come without volatility. At various times in 2024, CVNA stock has dropped sharply, often over 20%. The stock’s relative strength indicator (RSI) was at or near 70 in each case. While RSI isn’t a perfect indicator, it does give investors a guide to a stock’s momentum. And right now, the stock has an RSI of around 68. Plus, by most fundamental measures, Carvana is overvalued. 

That suggests that investors should prepare for a pullback in the stock, perhaps a sharp one. That would be the time for investors who have been on the sidelines to get involved.