The stock of beleaugured car seller Carvana (CVNA) – Get Free Report surged on Monday by as much as 33%.
Some traders speculated that the rise was from a short squeeze.
“Carvana is on an epic short squeeze today,” Genevieve Roch-Decter, CFA, a former small cap money manger, tweeted. “Short interest is 65%.”
Investors who are short sellers make a profit when stocks fall in value because they borrow the shares of the companies that they assume are overvalued. Short sellers sell these stocks and purchase them again at a lower price.
Short sellers made a profit by betting against stocks in 2022, only the second year during the past five years.
Choosing to bet against stocks such as electric vehicle manufacturer Tesla TSLA – Get Free Report, internet giant Amazon AMZN – Get Free Report and tech behemoth Meta Platforms META – Get Free Report turned out to be the top three money makers for short sellers whose returns beat the S&P 500.
U.S. equity and ADR short sellers generated a profit last year as shorts were up $300 billion in year-to-date mark-to-market profits on an average short interest of $973 billion, an increase of 30.83% for 2022, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a New York-based financial data company in a January report.
Carvana’s Ailing Finances
In 2022, Carvana’s shares lost most of their value as investors fled the ailing stock.
The “Amazon of used cars” likely needs an infusion of cash from an investor as its shares were crushed on the stock market, plummeting by a massive 96.84% at one point.
Carvana faced a myriad of headwinds it seems the company did not anticipate, including a downturn in the used-car market, a potential recession and the continued rise in interest rates, which makes monthly car payments expensive.
Analysts cut their price targets on Carvana. Bank of America analyst Nat Schindler cut his price target to $10 from $43 and lowered his rating to neutral from buy on Nov. 30.
Schindler is not convinced the company has enough cash to last for more than a year, stating that Carvana “is likely to run out of cash by the end of 2023. There is no indication yet of a potential cash infusion.”
It appears that no investors have stepped up to the plate to help out ailing Carvana, including CEO Ernie Garcia, Schindler wrote.
“There is no indication yet of a potential cash infusion, for example from the Garcia family (the CEO [Ernie Garcia] and his father the chairman), and it is impossible to predict if and when that would occur.”
If Carvana receives the much-needed capital, its stock could bounce back. The lack of liquidity results in “a situation where this stock’s performance looks binary: either it goes to zero or it is worth many times its current price.”
Moody’s, the rating agency, also cut Carvana’s prospects and lowered the debt to negative.
Other analysts have also reassessed the future of Carvana and Baird and Cowen, who were both former bulls of the stock, downgraded the company’s stock to hold only last week.
Oppenheimer downgraded the stock on Nov. 15. Analyst Brian Nagel lowered the shares to hold from buy, stating “significant nearer-term operational and financial risks” were the reasons. He did not give a price target.
Sales during the third quarter declined to $3.4 billion from $3.5 billion from the third quarter of 2021, which was much lower than the $3.7 billion that Wall Street had sought.
During the pandemic, Carvana was a sought after stock as consumers gravitated toward buying homes and creating the need to purchase a car.
Since interest rates were nearly zero, it was easy for consumers to finance their purchases of cars and Carvana could pay for its expansion with cheap money.
But, Carvana, once hailed as a pioneer for creating its car vending machines, went into debt five times during the pandemic.
As bottlenecks persisted during the shutdowns that occurred during the pandemic, car manufacturers found themselves to be low on inventory as semiconductor chips were in short supply. The lack of inventory pushed both used and new car sales to new levels as demand rose exponentially.