Carvana’s Surprising Stock Rally: Analyzing Fourth Quarter Performance and Market Response

On Wall Street, the spotlight was on Carvana Co.’s performance in the fourth quarter, which didn’t quite meet expectations in terms of both revenue and profit. Despite this, there was a notable surge in the company’s stock (CVNA), indicating a positive reaction from investors who were pleasantly surprised by the record gross profit per unit (GPU) numbers and the optimistic outlook presented.

During Friday’s morning trading session, Carvana’s stock shot up by an impressive 39%, setting the stage for its highest closing since April 25, 2022. This surge also marked the most significant one-day gain since July 19, 2023, when the stock skyrocketed by 40.2%.

Despite financial reports revealing a fourth-quarter loss wider than anticipated and revenue falling short of forecasts, the market response remained largely upbeat. Of particular note was Carvana’s announcement of a record GPU of $5,511 for the year, marking an impressive 82.4% increase from the previous year’s figure of $3,022. Additionally, the company projected a profitability metric to exceed $100 million in the first quarter, surpassing the FactSet consensus from January, which had predicted a figure below $80 million.

Raymond James analyst upgraded stock
Raymond James analyst upgraded stock based on a positive outlook.

Raymond James analyst Mark Ingles, who recently lowered his rating on Carvana’s stock to underperform, quickly reversed course in light of the positive outlook. The anticipated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) led Ingles to upgrade the stock to market performance.

His earlier downgrade was based on the belief that Wall Street’s perception of adjusted EBITDA was reasonable, and any potential benefits were already priced into the stock. Despite Carvana’s year-to-date loss of 1% by Thursday, it’s worth noting that the stock had surged by an astounding 1,017% in 2023.

Overall, analysts seemed surprised by the results. Out of the 23 analysts covering Carvana surveyed by FactSet, only two expressed bullish sentiments, while 16 remained neutral, and five held bearish views. Notably, eight analysts raised their stock price targets after the results, resulting in a new average target of $46.44, suggesting a 36% downside from current prices.

Short interest at 35.6% contributed to a significant surge
Short interest at 35.6% contributed to a significant surge in Carvana’s shares.

The surprise factor extended beyond analysts. Short interest, indicating shares used for betting on price declines, comprised 35.6% of the public float. This figure notably surpasses the short interest percentage for the original “meme” stocks, with GameStop Corp. at 22.4% and AMC Entertainment Holdings Inc. at 10.9%.

Michael Baker from D.A. Davidson, maintaining a neutral rating for Carvana’s stock, emphasized the absence of signs indicating Carvana’s readiness to rejuvenate growth, particularly within what he described as a “sluggish” industry.

Nevertheless, Baker acknowledged the impressive enhancements in cost structure and unit economics, envisioning potential leverage and industry-leading margins once top-line trends rebound. This, combined with persistently high short interest, fueled the substantial surge in Carvana’s shares.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
0
Would love your thoughts, please comment.x
()
x