Shares of Carvana have been on a hot streak, surging in value as the online seller of used cars reported higher-than-expected earnings. From starting the year at less than $5, Carvana’s stock now sits at over $54, leaving investors curious about the company’s recent success and its sustainability.
Financial Improvements Fuel Excitement
One contributing factor to the surge in Carvana’s stock price is its improved financial performance. In the second quarter, Carvana reported a per-share loss of approximately $1.11, surpassing Wall Street’s projection of a loss of $1.13. Impressively, the company also outperformed expectations in terms of earnings before interest, taxes, depreciation, and amortization (EBITDA).
According to Gordon Haskett analyst Don Bilson, Carvana had previously guided investors to anticipate an EBITDA of over $50 million for the second quarter. However, the actual result came in at a staggering $155 million, or approximately $85 million after deducting $70 million in nonrecurring benefits. Bilson was quick to acknowledge the respectable nature of this figure, considering initial expectations.
Strengthening Financial Position
Another encouraging development for Carvana is the agreement it reached with its lenders. This agreement enabled the company to eliminate a significant portion of its debt due for repayment in 2025 and 2027. While this newfound financial flexibility is positive, it’s important to note that Carvana continues to operate at a net loss, with no substantial shift in its long-term outlook.
Future Challenges and Adjustments
Projections for 2024 paint a slightly less optimistic picture. Due to a decline in used-car prices across the market, Carvana expects its sales for that year to reach $11.9 billion, down from the previously anticipated $13.1 billion as of April. Additionally, analysts predict a decrease in the number of vehicles sold by Carvana, with estimated sales reaching around 377,000 compared to the earlier estimate of 420,000.
Though these changes in sales volume result in reduced losses per share for 2024 (projected at $4.87 compared to the previous estimate of $5.37), Carvana continues to experience a significant outflow of cash. The negative free cash flow for 2024 is now expected to be approximately $667 million, compared to the previously projected $642 million.
While Carvana’s recent success is commendable, it is crucial to assess the long-term viability of the company amidst these challenges. Investors eagerly await further developments and financial indicators to gain a clearer understanding of Carvana’s future trajectory.
The Mysterious Rise of Carvana Stock
The recent surge in Carvana stock has left many investors puzzled. While some attribute the gain to impressive financials, others believe there is more to the story.
Short sellers have played a significant role in Carvana’s stock price movement. According to Ihor Dusaniwsky, managing director at S3 Partners, nearly half of the available shares for trading have been sold short. This is an unusually high percentage compared to the average for S&P 500 companies, which is less than 2%.
When a heavily shorted stock begins to show signs of improvement, panic sets in among short sellers. They rush to buy back shares, resulting in a rapid increase in stock prices. Dusaniwsky revealed that short covering in Carvana amounted to 13.75 million shares worth $547 million in 2023 alone. However, this also led to substantial losses for short sellers, with $1.54 billion in year-to-date mark-to-market losses in 2023 and an additional $442 million in July.
Despite the recent surge, Carvana stock is still significantly down from its peak in 2021. A huge gap remains, with the stock currently trading at around 86% below its record highs of about $377. This raises questions about the stock’s valuation and whether further gains are justified.
Wall Street analysts predict that Carvana will generate approximately $250 million in positive free cash flow in 2026. Based on this projection, the stock’s current valuation is quite high, trading at roughly 31 times that anticipated amount. In contrast, the S&P 500 trades at about 22 times estimated 2024 free cash flow.
While some remain skeptical about the sustainability of Carvana’s rally, arguing that short sellers will eventually close their positions and dampen buying pressure, others believe there is still potential for the company to generate more cash sooner than expected.
In light of these uncertainties, caution is advised for investors.
