Two Overvalued Auto Stocks

cars parked on parking lot during daytime

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Automobile and auto parts sales took a major hit during the worst of the COVID-19 pandemic. But the demand for used cars and aftermarket auto parts and accessories increased later, with people moving to get their old cars fixed or buy used cars to avoid using public transportation. As the economy has started to recover, the overall industry has been witnessing decent growth. While it is still grappling with a semiconductor chip shortage, its future growth looks hopeful with government support for the electrification of vehicles and proposed investment to address the semiconductor shortage.

According to Grand View Research, the global automotive aftermarket is expected to expand at a 3.8% CAGR from 2021 – 2028, to reach $529.25 billion. Investors’ increasing interest in automotive stocks is evident in First Trust NASDAQ Global Auto Index Fund’s (CARZ) 98.5% returns over the past year versus the tech-heavy Nasdaq’s 45.9% returns.

However, not all auto stocks are well-positioned to capitalize on the industry tailwinds. Carvana Co. (CVNA) and CarParts.com, Inc. (PRTS) currently look overvalued considering the bleak growth prospects. So, we think it wise to avoid these stocks now.

Carvana Co. (CVNA)

In the United States, CVNA, with its subsidiaries, operates as an e-commerce platform for buying and selling used cars. The company’s platform helps potential customers in making a purchase decision through desktop and mobile devices. It also offers 360-degree vehicle imaging technology and financing and warranty coverage.

On May 19, CVNA announced its expansion in the Pacific Northwest, offering as-soon-as-next-day touchless home delivery to Washington residents. However, this expansion is expected to take a toll on its already weak financials in the near term.

CVNA’s net loss for the quarter came in at $82 million compared to a $184 million net loss in the year-ago period. Also, its loss per share was $0.46 compared to a $1.19 loss per share in the prior-year period.

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