Online used-car dealer Carvana Co. has brought windfall gains to its believers this year with a 1,100% rally as investors pile in amid a resurging appetite for riskier stocks.
(Bloomberg) — Online used-car dealer Carvana Co. has brought windfall gains to its believers this year with a 1,100% rally as investors pile in amid a resurging appetite for riskier stocks.
Shares of the company jumped as much as 43% to $56.92 at the open in New York on Wednesday, after a deal to restructure its debt pile helped allay lingering concerns about its liquidity. Second-quarter revenue that beat analysts’ expectations are further bolstering the stock. They’ve since pared some of those gains.
Carvana’s 2023 surge follows a 98% 2022 plunge that left shares trading below $5 at the end of December.
The rapid rally marks a dramatic comeback for the company, though Carvana shares are still well below the record high touched in August 2021 at the height of the pandemic-driven stock-market boom. Some say the move is too extreme for a business that has yet to be profitable, and that it ignores the many risks still lurking in the used-car industry.
“The action in Carvana is a sign that a bit too much euphoria is creeping into the marketplace,” Matthew Maley, chief market strategist for Miller Tabak + Co., said in an interview.
“When some stocks see parabolic moves that are totally detached from their underlying fundamentals at a time when the stock market has become expensive, it’s a sign that a certain amount of froth has returned to the market.”
Carvana was among the many investor-darlings of 2020 and 2021, when production of new vehicles suffered due to severe supply-chain issues, leading to shortages of new cars and sending the prices of used cars through the roof. This year though, those sky-high prices are coming down fast, signaling troubles ahead for companies that sell used vehicles.
“Carvana’s debt deal is a smart move as the risk that consumption gets crushed in the second half of the year is elevated,” said Ed Moya, senior equity analyst at Oanda. “Carvana has had a nice ride this year but it looks like it might be a bumpy ride going forward.”
In fact, higher-risk growth stocks that had fallen out of favor last year when investors were fleeing to safety in face of recession fears, a hawkish Federal Reserve and sticky inflation, have been back in vogue in recent months. At the same time, interest in stocks with a high short interest has returned as well. On Wednesday, several heavily shorted names, including Lemonade Inc., FuboTV Inc., Peloton Interactive Inc. and Rackspace Technology Inc., climbed sharply.
Carvana checks both those boxes. About 48% of the company’s free float is held short, according to data from S3 Partners. As of intraday Wednesday, Carvana shorts were down $2.1 billion in year-to-date mark-to-market losses.
And S3’s Ihor Dusaniwsky expects short sellers’ pain to get even worse amid Wednesday’s surge.
“The Carvana short squeeze is going to tighten even more with today’s upward price action,” Dusaniwsky said. “Expect more short covering today and over the next few days as short sellers look for exit points to trim their exposure in a very unprofitable trade.”
–With assistance from Eric J. Weiner.
(Updates with details, background, more analyst comment in seventh through ninth paragraphs.)
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