Carvana's 2-year High Sends Wall Street Into a Whiplash

Wall Street found itself navigating through Carvana Co.'s fourth-quarter performance, which fell short of both bottom- and top-line expectations. Despite the less-than-ideal results, the stock (CVNA) experienced a substantial rally, reflecting a collective surprise over record gross profit per unit (GPU) figures and a positive outlook.

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In Friday's morning trading, Carvana's stock soared by an impressive 39%, positioning itself for the highest close since April 25, 2022. This surge also marked the most significant one-day gain since the stock rocketed up by 40.2% on July 19, 2023.

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Even with reported financials indicating a wider-than-expected fourth-quarter loss and revenue below forecasts, the market response remained overwhelmingly positive. Notably, Carvana revealed a record GPU of $5,511 for the year, exhibiting an 82.4% increase from the previous year's $3,022. The company also projected a profitability metric to exceed $100 million in the first quarter, surpassing the FactSet consensus from January, which anticipated a figure below $80 million.

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Raymond James analyst Mark Ingles, who had recently downgraded Carvana's stock to underperform, swiftly changed course after the positive outlook. The projected adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) prompted Ingles to upgrade the stock to market perform. His earlier downgrade was rooted in the belief that Wall Street's perception of adjusted EBITDA appeared reasonable, and any potential positives were already factored into the stock.

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Although Carvana had experienced a 1% loss year-to-date by Thursday, it should be noted that the stock had skyrocketed by a staggering 1,017% in 2023.

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Analysts, in general, appeared caught off guard by the results. Among 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 post-results, leading to a new average target of $46.44, implying a 36% downside from the current prices.

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Surprisingly, the element of surprise extended beyond analysts. Short interest, representing the shares used for betting on price declines, accounted for 35.6% of the public float. This percentage is notably higher than the short interest as a percent of float for the original "meme" stocks, with GameStop Corp. at 22.4% and AMC Entertainment Holdings Inc. at 10.9%.

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Michael Baker from D.A. Davidson, who maintained a neutral rating for Carvana's stock, highlighted the absence of indications that Carvana was ready to revitalize growth, especially within what he described as a "sluggish" industry. Despite this, Baker acknowledged the impressive improvements in cost structure and unit economics, foreseeing potential leverage and industry-leading margins once top-line trends resume. This, coupled with persistent elevated short interest, contributed to the significant surge in Carvana's shares.

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