After Leaping 37% Carvana Co. (NYSE:CVNA) Shares Are Not Flying Under The Radar

Carvana Co. (NYSE:CVNA) shares have had a really impressive month, gaining 37% after a shaky period beforehand. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in the United States' Specialty Retail industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Carvana as a stock not worth researching with its 3.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Carvana

What Does Carvana's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Carvana has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Carvana's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Carvana's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Carvana's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 46% gain to the company's top line. Revenue has also lifted 26% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 26% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 7.9% each year, which is noticeably less attractive.

With this information, we can see why Carvana is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Carvana's P/S Mean For Investors?

The strong share price surge has lead to Carvana's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Carvana's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about these 2 warning signs we've spotted with Carvana (including 1 which doesn't sit too well with us).

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.