Carvana (NYSE:CVNA) shares are rising as investors rally behind a short squeeze. With 65% of CVNA stock being held short, according to Fintel, Carvana was ripe for such a squeeze in a rising market. The Dow rose almost 1,000 points between Jan. 18 and Feb. 1.
CVNA stock rose 33% on Feb. 1 and another 24% overnight. It opened Feb. 2 at $17.43 per share with a market capitalization of nearly $3 billion. Shares traded below $5 as recently as Jan. 10.
Behind the Squeeze
The decision by the Federal Reserve to hike interest rates only .25% has brought out speculation in many names that were left for dead at the end of 2022.
But the stock market is not the economy. The fundamentals of the used car business are poor. Buyers can’t afford loans and inventory costs are high. Used car prices fell 14% last year. Some dealers sold cars at a loss.
But the prospect of falling market interest rates could hike the value of loans and bring in more buyers. Rival car dealers like Autonation (NYSE:AN) and Carmax (NASDAQ:CMAX) are both up more than 20% in 2023.
Carvana fell more than the rest, so its bounce is more dramatic. Created to be “the Amazon of used cars” by the son of car dealer Ernie Garcia II, who runs DriveTime, Carvana was worth $140 per share a year ago.
Carvana had a terrible September quarter, and worse is expected when December numbers are reported on February 23. But this is still a $14 billion-per-year business with almost $10 billion in assets and more than $450 million of cash on the books in September. It claims to be gaining share in a market of 36 million sales per year, twice the size of the new car market.
What Happens Next for CVNA Stock?
Short squeezes don’t last. Once they end, prices revert to fundamental values. In the case of Carvana, failure is definitely an option. Buyer beware.
On the date of publication, Dana Blankenhorn had a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.