CVNA - Carvana: Short Squeeze Alert

2023-09-14 12:10:40 ET

Summary

• Carvana Co. stock has appreciated by ~270% since February due to a squeeze that forced short sellers to cover their positions.
• There are reasons to believe that another squeeze could happen at any moment.
• Positive developments such as better-than-expected earnings and an improved economy further support the potential for a short squeeze.

Back in February, I received a lot of criticism in the comment section of my latest article on Carvana Co. ( CVNA ) after I noted that despite all the fundamental problems that the company faces, its stock can further appreciate due to the potential squeeze that would force short sellers to quickly cover their positions. That's exactly what has happened, and since that time Carvana's stock appreciated by ~270%.

Even though the company is now in even worse shape than before, there are reasons to believe that we could witness another squeeze in the foreseeable future. This is due to the fact that the short interest remains relatively high while Carvana's stock currently has a strong technical support level that could help it reach new highs as the sentiment becomes more bullish.

New Short Squeeze On The Horizon?

As I've already mentioned in the introduction, Carvana's stock has aggressively appreciated since February, but there are several developments that Carvana has going for it, which could lead to a further squeeze in the foreseeable future.

First of all, back in July, the company reported better-than-expected earnings results, which surprised many and prevented a depreciation of Carvana's shares. What's more is that Carvana's management announced that they aim to have a positive adjusted EBITDA in Q3, which made the street even more excited about the company's future. In the last three months alone, the sentiment has significantly shifted to the bullish side as most of the advisory firms that cover Carvana made upside revisions for the company's revenues and earnings for the following quarters.

Another positive development that Carvana has going for it is the overall improvement of the economy that made the previous short squeeze possible in the first place. As I've noted in my previous article on the company, it was the beginning of the disinflationary process back in February, which made it possible for Carvana's shares to appreciate further and reach the current levels. Considering that inflation is growing at a smaller rate than a year before, while the American economy is expected to expand by nearly 6% in Q3, it becomes obvious that the macro indicators are on Carvana's side as well.

If you combine all of those positive developments with a high short interest rate and solid technical support levels, then you'll have the opportunity to witness a potential short squeeze on the horizon. Seeking Alpha shows that Carvana currently has a short interest rate of 45% and is trading close to its 52-week high with a solid technical support level of over $40 per share, which creates a perfect setup for a squeeze that could help the stock appreciate further and trade at higher levels until it hits another technical resistance level. This has already happened after I published my article back in February, and it could once again happen now given all the developments described above.

Major Risks To Consider

By looking at the fundamentals, it's easy to see that there's no real value in holding Carvana's equity at this stage. By restructuring some portion of its debt, the company only managed to win some time until it would eventually go out of business. There has been a plethora of articles on Carvana's fundamentals by other authors which I encourage you to read, as they perfectly describe why there's no value in holding Carvana's shares for the long term.

In addition to that, it's obvious that the current valuation is also one of the reasons why Carvana is an extremely risky stock to own. The company has a market cap of ~$10 billion purely due to market speculation as its business is shrinking and sales are on the decline. While financially healthy companies have a forward EV/EBITDA ratio of 10x and below, Carvana has a forward EV/EBITDA ratio of ~50x which indicates that the business is extremely overvalued at the current price. As such, I would say that it only makes sense to trade Carvana's stock in both directions rather than buy its shares for the long term, as you won't find any value in buying and holding the company in your portfolio given all the risks that are associated with it.

The Bottom Line

Just as was the case at the beginning of this year, it doesn't matter how weak the company's fundamentals are, Carvana's shares could still represent an upside as long as the short interest remains high and there are solid technical support levels that could help its stock reach new highs as the sentiment becomes more bullish. The only thing that people need to remember is that Carvana is a high-risk and a high-reward play at this stage. As such, it's important to only trade what you can afford to lose as Carvana is not a long-term investment that you can hold in your portfolio for years.

At the same time, it's also important to note that fundamentals are not everything, and as the previous few years have shown us, the company could be overvalued and trade at excessive multiples, but nothing is stopping it from trading at even greater multiples if the market sentiment is on its side. That was the case with Carvana back in February when I published my first article on the company, that could once again be the case today, and it would certainly be the case with other stocks in the future since the market hasn't been rational for a long time lately.

For further details see: