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CVNA Stock – A Pure Short Squeeze Play

CVNA stock

Arguably the best performing stock in 2023, Carvana Co. (NYSE: CVNA) remains on a steady upward trajectory following its impressive Q2 performance. With the company smashing analyst expectations for Q2 revenue and EPS, the company shared more positive news regarding its debt. As is, the company reached an agreement with its noteholders to eliminate a substantial amount of its 2025 and 2027 unsecured note maturities and lower its interest expense over the next 2 years. In this way, the company’s profitability prospects improved significantly which could make CVNA stock poised to continue its impressive run since the beginning of the year thanks to its improved outlook.

CVNA Stock News

By disrupting the used car market, CVNA has caught investors’ attention thanks to its potential in capturing a major share of that market. While the stock dipped significantly during the Covid crash to below $30, the high demand for used cars sent CVNA soaring to more than $370 in August 2021. Given that the used car market was soaring at that time, CVNA aggressively pursued further growth and invested substantial amounts of cash to increase its inventory. 

In addition, CVNA looked to expand its business and acquired ADSEA’s US physical auction business for $2.2 billion in cash and pledged $1 billion for improvements across ADSEA’s 56 locations. To fund this acquisition, CVNA issued 15.6 million shares at $80 per share for net proceeds of $1.2 billion. At the same time, CVNA issued $3.2 billion in 10.25% senior unsecured notes due in 2030. 

While these actions could have helped the company achieve more growth, CVNA was hit hard by the Fed’s interest rate hikes to curb rampant inflation. Based on the Fed’s decisions, the once soaring demand for used cars took a massive hit as the rising interest rates impacted consumers’ ability to purchase used cars. Meanwhile, the supply chain constraints that affected vehicle manufacturers slightly eased – leading new car prices to drop. In light of these circumstances, prices of used cars significantly dropped from their Covid highs – leaving CVNA with expensive inventory and low demand for its vehicles. As a result, CVNA stock tumbled 98% in 2022.

Given these conditions, CVNA struggled in 2022 with declining profit margins and widening net losses. These losses were not helpful for the company given its heavy debt load of nearly $7 billion. With this in mind, CVNA’s debt is impacted by the Fed rate hikes since it includes variable rate debt from its credit facilities. Considering the company’s mounting debt and financial woes, many investors have been speculating that a bankruptcy filing could be in the mix for CVNA this year. 

Considering these fears, CVNA has been working to improve its financial position. In 2022, CVNA reduced its workforce by nearly 4000 employees. CVNA has also taken additional measures including reduced work hours in an attempt to navigate through weak sales. In that way, CVNA believes it could reduce its costs enough to weather the current macro environment.

Moreover, CVNA has been looking to improve its liquidity situation as the company agreed with Ally Bank and Ally Financial to sell up to $4 billion of auto loans. On that note, the deal involves receivables sold beginning January 13 and does not include receivables sold before that date. By selling its loans, CVNA would now be able to receive a new source of funding to help the company restructure its operations amid its mounting debt and unsustainable cash burn rate.

Meanwhile, CVNA is attempting to capitalize on its increasing net losses by introducing a tax asset preservation plan designed to protect long-term shareholders’ value by preserving the availability of its net operating loss carryforwards (NOLs). Since the company has significant NOLs that could offset its future federal taxable income, CVNA adopted this plan to limit its 5% shareholders from increasing their ownership stakes to preserve these NOLs. Under this plan, if a 5% shareholder increases their ownership by more than 50 percentage points over a rolling three-year period, all shareholders will be entitled to acquire shares at a 50% discount. In this way, a change in ownership may not occur – preserving the NOLs for the future. 

Despite the company’s financial woes, CVNA stock is trending among investors thanks to its short squeeze potential. With this in mind, a short squeeze appears to be underway for CVNA stock as the stock soared more than 192% YTD. It is worth noting that CVNA stock is highly shorted with a short interest rate of 68.3% and 80.7% of its float is on loan according to Ortex data. In light of this, CVNA stock could be an intriguing investment in the short term to capitalize on its price movements. With the company preparing to release its annual report on February 23, CVNA stock could be poised to soar if it shares positive guidance for 2023.

*Updated May 8th, 2023

Turning Around The Business

After having a rough year during 2022, CVNA could be back on track with its positive Q1 2023 earnings results. During its earnings call, CVNA stated its plan to become the largest and most profitable automotive dealer once again by realizing a positive adjusted EBITDA, significantly positive unit economics and finally achieving growth after completing the first two steps. CVNA has already started showing signs of recovery with the company reporting a $4,796 Non‐GAAP total gross profit per unit (GPU), and shrinking its losses on its adjusted EBITDA from $291 million to $24 million while expecting to achieve a positive adjusted EBITDA in Q2. 

Nevertheless, CVNA’s adjusted EBITDA could be an insufficient metric as the company’s interest expenses increased from $64 million to $159 million while its depreciation and amortization expenses increased from $37 million to $93 million, indicating that the company could still be a long way off profitability.

Moreover, CVNA reported that it sold 79,240 cars in its first quarter which is 25% less than its Q1 sales in 2022 causing its revenues to decrease to $2.6 billion over the same period. However, this decline in sales was expected as CVNA minimized its advertising and inventory as part of its efforts to achieve profitability. This decline in sales was also affected by the significant rise in interest rates since the start of 2022 as the Federal Reserve increased interest rates from a range of 0.25% to 0.50% in March 2022 to 4.75% to 5.00% in March 2023.

As a result, the demand for cars took a hit due to the combination of high prices and high-interest rates creating an affordability problem for many buyers. Subsequently, automotive dealers were forced to decrease prices on used cars with the prices of late models decreasing by 5%, while the prices of models that are 5 years old or more dropped by 15%.

Improving Macro Environment & Used Cars Season

However, after the Federal Reserve recently increased interest rates by another 0.25% on May 3rd, it might have hinted that it’s no longer planning for any further rate increases, with Federal Reserve chair Jerome Powell stating “We’re no longer saying that we anticipate”. With this in mind, demand for cars could increase once again in the future allowing automotive dealers to increase used car prices.

Typically, demand for used cars increases and reaches its peak around the seasons of spring and summer from May through August specifically. Looking back at the history of CVNA, the stock increased 71% from mid-May until it reached its peak in August 2021. Similarly, CVNA stock soared 93% in 2022 from mid-May until it reached its peak once again in August. Based on this, CVNA stock could peak in August in a similar fashion to the previous two years.

Short Data

Due to fears of bankruptcy in 2022, CVNA’s short interest has been continuously increasing over the past year. As of now, CVNA has a short interest of 64.6%, an 86.1% free float on loan, and 100% utilization. With this in mind, CVNA could be a substantial short squeeze play while anticipating its aforementioned upcoming catalysts.

Carvana short data

*Updated June 11th, 2023

Improved Q2 Outlook

With the new Q2 2023 financial outlook, CVNA is looking to achieve its first step in its plan to tackle its long-term debt since it is expecting to achieve an adjusted EBITDA of more than $50 million. Furthermore, CVNA increased its total gross profit per unit (GPU) forecast by 20% which is a massive advancement in its second step.

The new guidance is showing that CVNA is on the right track and is improving its position quickly – especially with the company increasing its loans sold or securitized to nearly $2 billion compared to $1.3 billion sold or securitized as of May 4, 2023.

Following CVNA stock’s impressive run on the promising Q2 outlook, the stock saw itself fall more than 21% due to analysts suspecting the improved Q2 forecast is a one-time upside. Analysts believe that even if CVNA achieved positive adjusted EBITDA, it would come at the expense of revenue growth. With that said, CVNA’s first priority is tackling its long-term debt and it is willing to sacrifice growth to do that since the debt poses a more significant threat to CVNA than its growth prospects.

Will The Squeeze Continue?

In the meantime, CVNA remains highly shorted with a short interest of 64.1% and 76.8% of its float on loan. At the same time, utilization rate remains high at 100% which indicates that CVNA might skyrocket on its Q2 earnings if the company delivers on its projections as that would signal the success of the company’s efforts to turn around the business.

Carvana short data

*Updated July 11th, 2023

There are a few notable factors that could be attributed to CVNA’s run this year. The first reason is increased demand for used cars due to consumers seeking affordable alternatives as a result of inflation and increasing car prices and the second reason is the increasing popularity of used EVs. These 2 factors are probably the main cause of why CVNA is currently running.

Growing EV Sales

According to CVNA’s 2022 end-of-year data, its EV sales have increased by 786% in the past 5 years. This trend has shown signs of growing according to data accumulated this year which includes a study by Cox Automotive indicating that 51% of vehicle shoppers are now considering purchasing an EV. On that note, CVNA provides more than 46 different EV models 40% of which are below $25 thousand which is extremely affordable given the current state of the automotive industry. 

Affordability Of Used Cars

In March, 17% of new cars in the market were under $30 thousand which is a drastic decline from just 5 years prior when 44% of new cars were under the $30 thousand price point and this figure further dropped this month to 8%. This drastic shift in car affordability is likely to cause a boost in demand for used cars which would signal more revenues for CVNA.

New cars below $30 thousand

Q2 Earnings

On August 3, CNVA is set to release its Q2 earnings report which will feature the revenue it obtained during the used car season. Analysts currently predict that CVNA will produce $2.6 billion in revenues this quarter which is a significant increase from its Q1 revenues of $1.8 billion. 

That said, CVNA’s revenue may exceed that figure due to the current disparity that exists between new and used car prices. This would be clearer in June’s CPI report which is set to be released on July 12 as investors would be looking for used car prices to continue declining as that would lead to more used car sales.

The Short Squeeze That Keeps Going

Despite its impressive run since the start of the year, CVNA stock remains highly shorted with a 61.3% short interest and 51.4% of its float on loan. Given that June’s CPI would be a major catalyst for the company since it will provide a better picture of the used car market, CVNA could see a continuation if used car prices continue to drop as it would mean that it might record more sales in its Q2 earnings which is another catalyst for the stock. 

CVNA Short data

*Updated July 24th, 2023

New Hope

Although CVNA surprised investors with much better than expected earnings in Q2, investors are enthusiastic about the stock’s outlook due to the restructuring deal that the company had with its noteholders. Through this agreement, CVNA was able to solve a major issue as it reduced its debt by $1.2 billion by eliminating 83% of its 2025 and 2027 unsecured note maturities – reducing its interest expense by $430 million per year over the next 2 years. 

The significance of this deal cannot be overstated since this deal shows the company’s debtors’ confidence in its ability to navigate through its debt successfully without going bankrupt. This is an especially bullish signal for investors since the company now has a better chance to tackle its mounting debt.

Not only that, but the reduction in interest expense will significantly boost CVNA’s profitability prospects since the company had an interest expense of $486 million in 2022 and has paid $314 million in interest so far this year. Based on this CVNA may inch closer to profitability in the next 2 years – especially since it is already working to reduce its costs.


However, the deal has its own risks that investors should note, chief among them is that it will pay higher interest on all of its debt. In this way, CVNA may find itself in a similar situation when the new notes approach maturity. Additionally, the deal stipulates that the company has to raise a minimum of $350 million by issuing new shares which would dilute current shareholders considering that the company may issue up to 35 million shares or $1 billion worth of shares whichever is greater. Considering the company’s current debt situation, it would be more inclined to raise the full $1 billion which would significantly dilute shareholders. 

Despite the deal’s substantial short-term benefits, it could be seen as the management kicking the can down the road which might backfire if CVNA is unable to successfully turn around its business.

CVNA Stock Financials

Q1 2023

In its Q1 2023 report, CVNA reported $8.646 billion in assets, including $488 million in cash and equivalents and $1.4 billion in vehicle inventory. CVNA witnessed a slight decline in its assets from $8.698 as its vehicle inventory decreased from $1.8, while its cash and equivalents increased from $434 million in Q4 2022. CVNA’s liabilities grew QoQ from $9.7 billion to $9.9 billion as its current liabilities increased from $2.5 billion to $2.8 billion. However, the company’s long-term debt slightly decreased QoQ from  $6.574 billion to $6.553 billion.

For the three months ended March 31, CVNA revenues declined YoY from $2.7 billion to $1.8 billion, while its gross profit increased from $298 million to $341 million. Finally, the company shrank its net loss YoY from $506 million to $288 million.

Q2 2023

Looking into CVNA’s Q2 report, the first thing that stands out is its revenues which came at $2.9 billion. While the company’s revenues declined YoY from $3.8 billion, it beat analyst estimates of $2.6 billion. The second thing that stands out in CVNA’s earnings is its gross profit improving YoY from $396 million to $499 million. This improvement was driven by the company reporting a second consecutive record gross profit per unit (GPU) of $6520 – a 94% increase YoY. At the same time, the company’s operating costs declined significantly YoY from $721 million to $452 million which indicates that the company’s turnaround plan is moving in the right direction. Based on this, CVNA’s net loss improved YoY from $438 million to $105 million.

As for its balance sheet, CVNA’s assets decreased from $8.6 billion at the beginning of the year to $7.8 billion. While this may be seen as a negative thing, it was driven by the company’s vehicle inventory decreasing from $1.8 billion to $1.3 billion which is another indicator of the success of the company’s plan. Additionally, the company’s finance receivables held for sale decreased over the same period from $1.3 billion to nearly $1.1 billion which shows that there is strong demand for the company’s loans. Meanwhile, the company’s cash balance increased from $434 million to $541 million which could be attributed to the decline in the company’s vehicle inventory.

Media Sentiment

@tradertvshawn is bullish on CVNA’s debt restructuring deal. 

@theresa_perrin believes CVNA stock could continue running to $100.

Technical Analysis

CVNA stock chart

CVNA stock is in a neutral trend with the stock trading in a sideways channel between $41.2 and $57.3. Looking at the indicators, the stock is trading above the 200 and 50 MAs which is a bullish indication, however, the stock recently broke the 21 MA support which is a bearish indication. Meanwhile, the RSI is neutral at 49 and the MACD is curling bullishly.

CVNA stock chart

As for the fundamentals, CVNA received a major boost in the short term following the debt restructuring deal as it reduced its debt by $1.2 billion and its interest expense by $430 million per year over the next 2 years. However, since the deal stipulates that the company raises capital through issuing new equity, the expected dilution may send the stock price lower. For this reason, investors could wait for the dilution to be over before entering long positions in CVNA stock.

CVNA Stock Forecast

Following CVNA’s debt restructuring deal, the company’s prospects improved substantially due to the $1.2 billion reduction in its debt. At the same time, the company may be closer to profitability than ever as a result of the $430 million reduction in interest expense over the next 2 years – especially if the company continues to reduce its costs at the current pace. 

While the company’s plan appears to be moving in the right direction, any setbacks could set the company back significantly as it is set to pay higher interest on its debt based on the deal. In this way, the company may find itself in a similar position in the future if its plan does not provide the anticipated results. 

Despite this, the company has been running more efficiently than ever and its ongoing improvements could see CVNA stock continue its impressive run since the beginning of the year on more positive updates.

If you have questions about CVNA stock and where it could be heading next feel free to reach out to us in our free alerts room!


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