Carvana (NYSE: CVNA) stock just experienced a dramatic turnabout. The stock price is up more than 200% since the beginning of the year as investors communicating through Reddit investing boards have again banded together to buy shares of a distressed company in the hopes of inducing a short squeeze.
With Carvana in severe financial straits, buying such a stock brings a significant risk of an eventual wipeout. Investors should understand how the higher stock price could help the company. Still, they should probably see the jump in shares as a cautionary tale rather than an opportunity for a quick return on this retail stock .
Carvana pioneered online transactions to buy a used car. This eliminated much of the overhead associated with car purchases, such as commissions for salespeople and large properties to showcase vehicles. But a worrisome economy, rising interest rates for auto loans, and concerns that auto sales will slow led many shareholders to sour on this model. When Carvana's net margins fell to negative 15%, investors lost some tolerance for what was effectively a money-losing company.
For further details see:
Here's Why You Should Avoid the Carvana Short Squeeze Like the Plague