by The stock of beleaguered car salesman Carvana (CVNA extension) – Get a free report on Monday it increased up to 33%.
Some traders speculated that the increase came from a brief squeeze.
“Carvana is in an epic short squeeze today,” tweeted Genevieve Roch-Decter, CFA, a former small-cap money manager. “The short-term interest is 65%.”
Investors who sell short make a profit when stocks fall in value because they borrow the shares of companies they assume are overvalued. Short sellers sell these shares and buy them again at a lower price.
Short sellers turned a profit betting against stocks in 2022, only the second year in the past five years.
Choosing to bet against stocks such as electric vehicle maker Tesla TSLA – Get Free Report, internet giant Amazon AMZN – Get Free Report and tech giant Meta Platforms META – Get Free Report turned out to be the top three moneymakers per short sellers whose returns are better than the S&P 500 index.
Short sellers of US equities and ADRs generated a profit last year as shorts increased by $300 billion in year-to-date mark-to-market profits on average short interest of $973 billion, an increase by 30.83% for 2022, according to Ihor Dusaniwsky, chief executive officer of predictive analytics at S3 Partners, a New York-based financial data firm in a January report.
Carvana’s struggling finances
In 2022, Carvana’s shares lost most of their value as investors fled the struggling stock.
The “Amazon of used cars” probably needs an infusion of cash from an investor as its shares were crushed in the stock market, tumbling a whopping 96.84% at one point.
Carvana has faced a myriad of headwinds the company doesn’t seem to have anticipated, including a downturn in the used-car market, a potential recession, and ever-rising interest rates, which make monthly car payments expensive.
Analysts have cut their price targets on Carvana. Bank of America analyst Nat Schindler cut his price target to $10 from $43 and downgraded his rating to neutral from the buy on Nov. 30.
Schindler isn’t convinced the company has enough cash to last more than a year, saying 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 forward to help struggling Carvana, including CEO Ernie Garcia, Schindler wrote.
“There are still no indications of a potential cash infusion, for example from the Garcia family (the CEO [Ernie Garcia] and his father the president), and it is impossible to predict if and when that will happen.”
If Carvana receives much-needed capital, its shares could recover. The lack of liquidity results in “a situation where the performance of this stock appears to be binary: it either goes to zero or is worth many times its current price.”
Moody’s, the rating agency, also cut Carvana’s prospects and downgraded the debt to negative.
Other analysts have also reevaluated the future of Carvana and Baird and Cowen, who were both former bulls of the stock, downgraded the company’s stock just last week.
Oppenheimer downgraded the title on Nov. 15. Analyst Brian Nagel lowered the shares to hold since the purchase, saying “significant short-term operational and financial risks” were the reasons. He did not give a price target.
Sales during the third quarter fell to $3.4 billion from $3.5 billion in the third quarter of 2021, which was far less than the $3.7 billion Wall Street had been seeking.
During the pandemic, Carvana was a sought-after stock as consumers gravitated towards buying homes and created a need to buy a car.
Since interest rates were nearly zero, it was easy for consumers to finance their car purchases, and Carvana could pay for its expansion with cheap money.
But Carvana, once hailed as a pioneer for creating its auto vending machines, has gone into debt five times during the pandemic.
As bottlenecks persisted during shutdowns that occurred during the pandemic, automakers found themselves short on inventory as semiconductor chips were in short supply. The lack of inventory has pushed used and new car sales to new heights as demand has increased exponentially.
