Shares of Carvana(NYSE: CVNA) rose more than 44% this week, according to data from S&P Global Market Intelligence. The online used car marketplace reported surprisingly strong earnings for the first quarter of 2024, showing growth and profitability that was lacking in recent years. As of Friday, May 3, Carvana stock is up 129% this year, significantly outpacing the broad S&P 500 index.
Here's why Carvana stock was rising yet again this week.
Growing again, generating a profit
2022 and 2023 were rough years for Carvana, as customers retreated from pandemic-era online used car shopping, sending unit volumes tanking for multiple quarters. However, late last year the company was able to stabilize these volume declines, and in Q1 of this year, volumes started to grow meaningfully again. Retail units sold were 92,000 in Q1, up 16% year over year and a sequential increase of 21%. This number is still below where Carvana was in Q1 2021 but is a good sign for the business.
On top of volume growth, Carvana posted a surprise profit in Q1, with net income of $48 million. This is compared to a net loss of $288 million in Q1 of last year. This combination of growth and profitability likely had investors in Carvana quite happy. Carvana also has a high short interest, estimated at 33% of its freely tradable shares. A high short interest means that a positive earnings report could have driven short-sellers to buy back their shares and ignited a short squeeze. It is possible this is what drove Carvana's stock higher after the company reported earnings this week.
Should you buy shares?
Carvana is perhaps the best-performing stock in the world since the start of 2023, with shares up over 2,000% in around a year and a half. It currently has a market cap of $25 billion.
I think the stock is incredibly risky for investors. Even though Carvana generated $134 million in operating income in Q1, that was below its interest expense of $173 million. It has a high debt load of $5.5 billion and historically struggled to generate any sort of positive free cash flow. Even though the company is growing again and showing a slight profit, the stock looks wildly overpriced at a $25 billion market cap, plus its $5.5 billion in debt.
Stay away from this volatile stock, even though it is one of the top performers of the last 18 months.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
