Nothing is certain in the stock market – that’s for sure. It has been proven again today when in a sudden turn of events, shares of Carvana plummeted to a great low within 24 hours of soaring to great heights on Thursday. Though the company was already going through financial turmoil for quite a few months, experts have varying opinions regarding the volatility of its share prices.
Shares of online car retailer Carvana experienced a significant surge on Thursday, closing 56% higher than the previous day. This boost came in response to the company’s announcement that it expected to achieve $50 million in adjusted EBITDA for the current quarter, driven by improved profitability per car sold.
This is significantly higher than the previously forecasted adjusted loss of $6 million by Wall Street analysts. At the end of the day, the company’s market capitalization stood at $4.58 billion.
Carvana’s stock experienced a significant surge during the session, with its shares climbing by as much as 68% to reach a peak of $26.09. This marked the highest point the stock had reached in over eight months. At the end of the session, the shares were valued at $24.23, and the trading volume hit a record high, with over 173 million shares being exchanged.
This upward trend was a much-needed turnaround for Carvana, which had seen its stock prices decline steadily from its peak of $360 per share in 2021 to single digits.
Despite briefly reaching $25 per share following the profit update, Carvana’s shares closed at $19.07 today, erasing a substantial portion of its recent gains. The fall was reported to be around 21.3%.
Some Early Reports and Numbers
In May, Carvana made a bold prediction that it would report a profit in the second quarter, without providing a specific figure. It also announced that it anticipates setting a new record for its non-GAAP total gross profit per unit, with profits per car exceeding $6,000. This achievement is noteworthy considering the company’s existing debt burden.
Carvana’s founder and CEO, Ernie Garcia, highlighted the company’s commitment to driving profitability, leading to substantial cost savings and increased efficiency. This focus will remain integral to their continued execution of the business plan.
It is important to note that used car prices have remained high compared to pre-pandemic levels, even though they have seen some decline since reaching all-time highs last year.
In the first quarter of 2023, Carvana reported a non-GAAP total gross profit per unit of $4,796 and an adjusted EBITDA loss of $24 million. Carvana’s stock experienced significant fluctuations, reaching above $50 per share in 2022 before plummeting to under $4 per share later that year.
It remains uncertain whether the anticipated adjusted profit in the second quarter will enable Carvana to generate unadjusted profits during that period. Additionally, the source of revenue contributing to the company’s improved metrics is unclear.
Notably, despite improved adjusted profitability in the first quarter of this year, Carvana’s revenues declined compared to the same period last year. Before any speculation or trading, investors should be aware of the risks of investing in Carvana.
Reasons behind Sudden Fall in Share Price of Carvana after Sharp Rise
Carvana’s high levels of debt, declining revenue, and lukewarm reception from industry analysts overshadowed the positive profit projections. Concerns were also raised about whether the company’s improved profitability was merely a one-time occurrence.
Experts echoed the sentiment that Carvana’s increased profitability was being achieved at the expense of falling revenues. Analysts on Wall Street currently anticipate Carvana to report revenues of $2.57 billion in the second quarter and $2.63 billion in the third quarter, which pale in comparison to the revenue figures of $3.88 billion and $3.39 billion, respectively, in the same quarters of 2022.
Carvana faces significant challenges as a highly indebted company, with long-term debt exceeding $6.5 billion at the end of 2022. With current gross profit in the few hundred million range per quarter and a negative operating cash flow of $66 million in Q1 2023, the road ahead appears steep for the company.
Due to the ups and downs in the share prices of the company, we should know – why are stock prices so volatile.
How will Short-Sellers Suffer?
This year, short sellers who have placed bets against used-car dealer Carvana have experienced significant losses amounting to over $1 billion. These losses are a result of the company’s remarkable performance in the stock market, with Carvana’s shares surging approximately 422% in 2023.
This surge has been driven by the company’s successful cost-cutting initiatives implemented in response to the Federal Reserve’s aggressive increases in interest rates. Short positions currently make up around 56% of Carvana’s outstanding shares, contributing to the substantial losses incurred by short sellers.
Why are Stock Prices so Volatile?
Carvana has revised its second-quarter guidance, anticipating an adjusted gross profit per unit surpassing $6,000, which is higher than its previous forecast of over $5,000 per unit. While this update may appear positive, investors should exercise caution when considering the company’s stock.
Despite experiencing a pullback, the stock has risen approximately 310% year to date. Additionally, concerns remain regarding Carvana’s ability to achieve profitability and reduce its debt.
Carvana has undergone a significant shift in its business model, focusing more on providing auto loans rather than its traditional used car sales. However, this change has brought about several challenges for the company.
Defaults on the loans are on the rise, which is causing a strain on Carvana’s operations. In an attempt to mitigate the issue, the company tried to swap $1 billion of loans, but this action was considered a default by S&P, leading to a downgrade in Carvana’s rating.
The volatility of Carvana shares is quite evident from the sudden fall in share price of Carvana after sharp rise, in a short span of 24 hours. This indicates the risks of investing in Carvana and why you should not include it in your portfolio.
Should you Invest in Carvana? What are the Risks of Investing in Carvana?
Carvana, a highly sought-after stock during the Covid pandemic, experienced increased demand as consumers shifted towards online car buying and faced limited availability of new vehicles.
- However, the company missed the opportune moment to fully capitalize on this trend and instead initiated a restructuring plan centred on reducing costs rather than driving expansion.
- The risks ahead are substantial, as Carvana’s loan portfolio is likely to experience further deterioration, resulting in significant losses.
- Moreover, the US used car market is facing its own challenges, with sales stagnating. This will only add more pressure on Carvana’s revenue.
- The combination of increasing defaults and sluggish sales paints a bleak picture for the company.
- Furthermore, the current strategy of providing loans to financially vulnerable individuals and relying on unsustainable used car prices is not viable.
- Caution is advised for investors considering Carvana at present due to potential risks associated with a temporary surge in share prices driven by meme investors. It is important to note that this surge may not yield favourable outcomes in the long run.
- The company currently faces significant debt obligations, and its sales are exhibiting unfavourable trends.
It will likely take a considerable amount of time for Carvana to stabilize its business model. As a result, investing in Carvana in 2023 is not considered a safe option. However, investors who can tolerate volatility and hold the stock for the long term might consider staying invested, anticipating that once the loan portfolio is resolved and the company regains stability, coupled with a revised business model, the stock could recover.
Nevertheless, it is unlikely that Carvana will reach previous valuation levels for many years to come. Potential investors should carefully consider the risks of investing in Carvana before making any investment decisions.
Also Read: 16 Best Penny Stocks to Buy Under $1
Closing Words
While the initial reaction from investors to Carvana’s improved per-sale profitability and adjusted profits for the second quarter was positive, it remains uncertain whether the company’s long-term trajectory has changed enough to justify a substantial reassessment. Today, cooler and more sceptical heads seem to have prevailed.
Shares of Carvana plummeted to a great low within 24 hours. Nevertheless, with Carvana’s stock price hovering around $19 per share, the company still boasts a valuation close to one-third higher than before its latest news. Regardless of the mixed reception, this outcome can be seen as a win for Carvana.
Source: NYSE
