The Squeeze Is On For Carvana Stock Prices

Key Points

• Carvana outperformed in Q2 and guided Q3 above consensus. 
• The company also announced debt restructuring that will save nearly $1 billion over 2 years. 
• Shares are up double-digits on a short squeeze, but a sustained rally may not come until later in the year. 

Carvana NASDAQ: CVNA has struggled to regain business and stock price traction for the last year. The stock price has suffered from significant short-selling with short interest over 50% of the float. That’s a ridiculously high figure and a primary reason the stock is up 42% in pre-market action.

Another reason is the Q2 results and outlook for Q3, which is much better than expected. The takeaway is that a short squeeze is in play, and it could take this stock up another few handles before it runs its course. The caveat for traders and investors is that the stock price may not move vertically or in a straight line. The market is facing significant technical hurdles and no few short-sellers who might cap gains. 

Carvana Has Solid Quarter; Restructures Long-Term Debt

The Carvana stock price catalyst is the combination of results and debt reduction that have it on track to return to sustain positive EBITDA in the current quarter. The Q2 results are marked by solid selling and pricing, which has the revenue down 23.5% YOY to $2.97 billion but $0.360 better than expected or about 1370 basis points.

The number of retail units sold fell by 35% and was offset by a smaller decline in pricing. The best news is that gross profit per unit increased by 94% YOY to help drive solid bottom-line performance. 

The company lowered expenses and reduced the net loss to 3.5% compared to 7.8% last year. Perhaps more significantly, the net loss improved by 750 basis points sequentially, and it is expected to improve again in the current quarter.

Among the factors aiding the return to growth is debt restructuring, which has reduced the company’s load significantly. Execs say that 90% of the outstanding senior notes were restructured to reduce total debt, extend maturities, and reduce near-term interest expense, relieving pressure on the cash flow. The deal is expected to reduce expenses by nearly a billion dollars over the next 2 years. 

The only negative to come out with the release is the intention to sell shares. The company filed to sell up to 35 million shares to raise $350 million in capital. The dilution is not good news but will help the company long term.

The cash injection will help it to continue with its growth strategy and will help shore up the balance sheet in the interim. Thirty-five million shares are equal to 32% of the shares outstanding. 

The  Sell-Side Helps Drive Volatility In Carvana 

The primary takeaway from the analysts and institutional data is that they are helping to drive volatility. The analysts rate the stock at reduce and see it trading well below the post-release levels, but the recent action is biased to the upside.

The most recent action includes several price target increases, with the Marketbeat.com consensus target firming after a significant YOY decline. Institutional activity is equally mixed but biased more firmly to the upside. The institutions are rotating into and out of the stock, with total activity ramping into Q3 and bullish on balance. This is consistent with bottoming action over the last year and will likely continue as the year progresses. 

The technical outlook is bullish, but it will take some patience. The market is bottoming, but it appears to be only partway through a large Head & Shoulders Reversal.

The post-release action has the market up and testing resistance at the pattern's neckline where resistance is already apparent. Assuming the market follows through on this signal, the price may consolidate at this level but will fall back to a more solid support level soon.

In this scenario, the pullback will result in a buying opportunity and form the 2nd shoulder of the pattern. Regardless, the Carvana price must exceed $57.50 and sustain the move before a sustained rally can form.