$Carvana (CVNA.US)$ The business model of buying and selling cars online has resonated with investors. The stock of Carvana has recently been on a strong upward trend, and after releasing the Q3 financial report on Thursday, it continued to surge, reaching a historical high of $259.39, up 25%. As Carvana continues to climb into overbought territory, investors have to consider risk thresholds, and analysts have expressed cautious views on its valuation.

The used car retailer announced its third-quarter financial report on Thursday, another record-breaking quarter, with a 34% increase in car sales, a 32% revenue growth to $3.66 billion, higher than the estimated $3.45 billion. Earnings per share reached $0.64, exceeding the estimated $0.17. Carvana expects sales in the fourth quarter to exceed 34% and adjusted EBITDA for the 24 fiscal year to be 'significantly' higher than the high end of the range of $1 billion to $1.2 billion. All of this is happening in what is considered a challenging automotive industry environment.

The company currently has enough property to support retailing over 3 million cars annually and refurbishes cars closer to customers' locations to improve unit economics by reducing transportation costs.

CEO Ernie Garcia stated during the company's earnings conference call, "We haven't finished digging our moat yet," explaining in detail how investments in infrastructure will lead to growth "far exceeding current scale."

JPMorgan's Rajat Gupta and Ryan Brinkman stated, "The third-quarter performance should be seen as a clearing event that may dispel concerns or doubts about the company's recent progress in unit economics, primarily focused on expanding the moat against competitors." They added that Carvana's debt restructuring in 2023 has made it 'a more profitable and flexible company.'

Furthermore, accelerating sales growth amidst steady advertising spending indicates there is still room for improvement. The company plans to increase advertising spending by $5 million to $10 million in the current quarter, which is typically a slow period for car sales.

Jefferies' John Colantuoni and Brent Thill stated: "Despite stable advertising spending and relatively stable inventory levels, Carvana still achieved over 30% sales growth, which has deeply impressed us, indicating the company still has significant market share growth potential."

In the past 6 months, Carvana's stock price has soared by an astonishing 177%, while the S&P 500 index has risen by 14%, and its closest competitor, Carmax (KMX.US), has only seen a 10% increase. Seeking Alpha analyst Dave Kranzler said the stock price looks "ridiculously overvalued". He believes that upcoming defaults, a debt restructuring essentially delaying the debt burden by two years, and stricter underwriting standards from its financing partners will weaken Carvana's valuation.

"We believe there is little upside in the current valuation," Piper Sandler's Alexander Potter agreed with this view and reiterated his neutral rating, adding, "Historical beta values inaccurately reflect Carvana's true risk profile."

Editor/rice