Shares of Carvana (CVNA -6.72%), an online used-car buying platform that offers consumers a way to buy while obeying social-distancing restrictions, were soaring nearly 17% at 3:17 p.m. EDT on Tuesday likely due to a short squeeze.
Carvana has a compelling growth story as the company continues to expand its reach across the U.S. with its online car buying platform, delivery options, and car vending machines. But the company remains unprofitable, and its rapid expansion has burned through cash at a high rate.
Short interest remains high, with 48% of Carvana's float sold short. With so much short interest, some bears may opt to cover their position simply because they don't want to "fight the Fed," which appears willing to do whatever it takes to fuel the economic recovery. Or the short-sellers have reason to believe Carvana could receive a significant boost in brand awareness and market share during the pandemic.
At the very least, the company appears better positioned to thrive in the current environment than much of the rest of the auto industry, and its stock price over the past three months reflects that.
Investors should take today's stock pop with a grain of salt as there are many factors in play. We have to consider that Hertz's (HTZG.Q) bankruptcy and possible partial (or full) liquidation of its fleet could further depress used car values, which would damage Carvana's business. We also don't know if the pandemic will permanently push car buyers toward online platforms, or if it was a temporary jolt. And how quickly will consumers be making big-ticket purchases like cars as the economy gradually recovers and unemployment remains high?
Carvana has a great growth story, and it's well positioned for COVID-19 with its online buying focus. But there is a lot of short interest due to the stock's premium valuation while the company remains unprofitable. This is a high risk, high reward stock, and investors would be wise to acknowledge its volatility and valuation before investing.