Carvana Stock Analysis: Is It Time to Hit the Brakes or Hang Tight?

Stock Market

Plenty of “hot stocks” from the 2020/2021 runaway bull market have bounced back in a big way so far in 2023, but few have done it to the extent Carvana (NYSE:CVNA) has year-to-date. As you may recall, at one point CVNA stock was changing hands for as little as $3.55 per share last December.

Since then, however, shares in the automotive e-commerce company have cruised to much higher prices, especially throughout this summer.

Changing hands for around $38 per share today, if you got in near its lows, you would be up more than tenfold on your position.

The question now, though, is whether there’s enough gas left in the tank. Investors have bet big that a “less bad” scenario will play out for this company.

The short-side remains crowded, confident that their bearish thesis (more below) will still prevail.

CVNA Stock: What’s Behind its Stunning Recovery

It’s easy to say that CVNA’s more than 1070% gain over the past eight months is the product of an extended short squeeze.

Last January, as much as 65.4% of Carvana’s outstanding float was sold short, according to Fintel. This short interest has since come down, to around 46.2% of float today.

While not for certain, this may suggest that a bona fide short squeeze situation has played out with CVNA stock. That is, shares initially moved higher, forcing some on the short-side to quickly close out positions. This short-covering then pushed the stock even higher, leading to even more short-covering/short-squeeze rallies.

Yet even if this rally is because of a short-squeeze, it’s not as if said squeeze emerged out of thin air. It’s important to note that, back in December, there were major bankruptcy fears regarding Carvana.

It seemed as if the company, burning through cash as the supposed “used car bubble” deflated, would have to go the Chapter 11 route.

But between then and now, through equity raises, operating cost reductions, the reporting of promising guidance, and a debt restructuring deal announced last month, this risk has decreased significantly.

Is it Time to Hit the Gas, or Hit the Brakes?

After being on the verge of a “game over” moment, things have become “less bad” for CVNA stock, explaining its stunning escape from the stock market junkyard. However, despite suffering billions in trading losses, the short-side hasn’t given up.

There’s a reason nearly half of Carvana’s float remains sold short. While it’s made the right moves in order to avoid Chapter 11, can the company improve results further, to the extent that it supports CVNA’s current share price? The skeptics say no.

In their view, additional improvements to the company’s operating performance will prove challenging. Sell-side forecasts, which still call for continued net losses in 2024 and 2025, help to give credence to this bear case.

Forecasts are merely projections, and should not be taken as near-certainties.

This may hold especially true for Carvana. I wouldn’t write off the possibility the “less bad” scenario keeps playing out. So far, the company has exceeded expectations with its turnaround plan.

Additional improvements to margins, coupled with a normalization of used car demand, could get things fully back on the right track. At the right price, this could make the stock worthy of a speculative buy.

The Verdict

While establishing Carvana is not the slow-moving car wreck the bears make it out to be, caution is key here. The risk-averse should be nowhere near CVNA. Even if the most risk-hungry may want to take it slow.

If you currently own the stock, you may want to take some chips off the table as this highly volatile stock may cough back more of its summer surge gains.

That said, current holders may not want to hit the brakes completely. If you’ve yet to enter a position, the next round of weakness could provide the perfect entry point.

I wouldn’t count on CVNA stock soon becoming a smoother ride, but there is a clear takeaway. The short-side quickly jumped to conclusions about it back in December, and may be doing so once again.

CVNA stock earns a B rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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