Carvana went into overdrive on Friday, shares surging nearly 40% after the online used-car retailer hit a major milestone, posting its first annual profit. This impressive turnaround was fueled by savvy cost-cutting measures and a strategic debt-reduction deal with bondholders.
The stock’s rally puts it on track to close at a year high, though it’s still a ways off from its all-time peak back in 2021 when it reached $376.83 per share. Adding to the excitement, the stock’s high short interest of about 16.8% of free float as of Jan. 31 made it ripe for a short squeeze.
Carvana, renowned for its innovative car vending machines, reported a profit of $150 million for 2023, a remarkable improvement from its $2.89 billion loss the previous year. The company’s business model, which allows customers to buy cars online, gained traction during the COVID-19 pandemic when people opted for used cars due to chip shortages impacting new vehicle production.
However, as the chip supply improved, Carvana found itself with a surplus of used cars purchased at higher prices, leading to increased debt. Moreover, the allure of new vehicles with attractive financing and trade-in offers drew consumers away from the used car market.
To combat these challenges, Carvana inked deals with most of its term bondholders last July, slashing its outstanding debt by over $1 billion. This move, coupled with cost-cutting measures and inventory clearance strategies, has significantly strengthened the company’s financial position.
Analysts are bullish on Carvana’s future, with J.P. Morgan analyst Rajat Gupta noting, “We believe Carvana has optimized operations enough to execute its way through a sideways macro and limit downside to estimates.” Following the positive earnings report, analysts have raised price targets and ratings on the stock.
Over the past year, Carvana’s shares have skyrocketed by more than five times, highlighting the market’s confidence in the company’s ability to navigate challenges and drive sustainable growth.
(Source: CNBC | Reuters | Barron’s | MarketWatch)
