Carvana stock surges over 50% amidst short sellers’ heavy losses

Used-car retailer Carvana Co (CVNA.N) saw a significant surge in its stock price on Thursday, closing up 56.0%. The stock experienced further volatility on Friday, rising as much as 12% before dropping over 5% during morning trade.

While Friday’s drop may have tempered some of the stock’s gains, it did little to alleviate the pain felt by short sellers who had bet against Carvana. Thursday’s rally had already pushed their losses higher for the year.

The stock reached a more than eight-month high, rising as much as 68% during the session, and closed at $24.23 with a record-high trading volume of over 173 million shares. The stock’s rally inflicted heavy losses on short sellers, with mark-to-market losses estimated at as much as $440 million.

This boost was driven by traders covering their bearish bets after Carvana forecasted second-quarter adjusted earnings above Wall Street expectations thanks to cost-cutting measures.

Carvana’s positive outlook, coupled with the short squeeze, propelled its stock higher, despite some volatility in Friday’s trading session.

High short interest

According to data from markets data provider S3 Partners, Carvana shares have a high short interest, representing 55.66 percent of the float.

“Shorts have now topped the mark in year-to-date, mark-to-market losses, down $1.037 billion in mark-to-market losses for the year”,S3 Partners’ Ihor Dusaniwsky said.

However, Dusaniwsky also noted that most of the stock’s surge was driven by traders who sought to take long positions. These decisions were based on the company’s improved outlook rather than short sellers covering their losses.

“We should expect more buy-to-covers over the next few days if this price level holds, as not many short sellers can remain short a stock with a -79 percent June month-to-date return,” Dusaniwsky said. There should be a few taps on the shoulders from chief risk officers to trim or exit CVNA short positions.”

EBITDA forecast exceeded expectations

Carvana, established in 2013 as the “first complete online auto retailer,” aimed to eliminate physical dealership overhead by leveraging “consumer-friendly technology.” Although it had previously indicated positive adjusted earnings of its quarterly profit in May, the company only disclosed the specific figures on Thursday.

While improved per-sale profitability and adjusted profits for the second quarter are positive, observers at TechCrunch remain skeptical whether the company’s current win signifies a substantial long-term shift.

Meanwhile, Stephens analyst Daniel Imbro disclosed that Carvana’s second-quarter adjusted EBITDA of over $50 million surpassed consensus expectations. According to Imbro, the consensus forecast anticipated a $6 million or higher loss.

“We are impressed with Carvana’s ability to improve its non-GAAP operating metrics as the shift to profitability, while sacrificing growth, has realized benefits faster than we anticipated,” said Imbro.

Carvana also revealed its non-GAAP total gross profit per unit projection to surpass $6,000. This number set a record for the Tempe-based company and reflected a notable 63 percent improvement compared to the same quarter of the previous year.

“Our record-breaking 2023 first quarter is evidence that our strategy is working, and our updated Q2 2023 outlook demonstrates that our progress continues to positively impact the business even faster than expected,” said Carvana founder and CEO Ernie Garcia.

Carvana implemented cost-cutting measures last year to preserve cash as concerns about potential bankruptcy caused its stock to plummet by 98 percent in 2022.