What happened

One day after soaring on a better-than-expected earnings report, shares of Carvana (NYSE:CVNA) were sliding as the online used car dealer got downgraded by Bank of America.

The stock finished the day down 13.9%.

A parking lot at a car dealership filled with cars.

Image source: Getty Images.

So what

Yesterday, Carvana shares surged 28.1% as the company posted a narrower loss than expected in its second-quarter earnings report and said it was seeing a surge in demand, which was actually leading to inventory constraints. Revenue increased 13% to $1.12 billion in spite of the coronavirus headwinds, but that was slightly below estimates at $1.14 billion.  

Given the stock's pop yesterday and its already frothy valuation, some sort of pullback today may have been inevitable. But the analyst downgrade clearly helped bring the stock back in orbit as Bank of America analyst Nat Schindler lowered his rating from Buy to Neutral. Schindler's call was mostly valuation-based, saying the risk/reward of the stock price now seems balanced. He noted capacity constraints that could dampen the chances of a fast recovery from the crisis.  

Now what

In its outlook, Carvana said it was currently seeing more demand than ever before. But because of an earlier pause in purchasing vehicles, as well as reductions in capacity and COVID-19-related challenges, the company said it was inventory-constrained and that sales volumes in the near term would be determined by production capacity at its inspection and reconditioning centers.

Carvana has been one of the best-performing stocks on the market since the crash. Shares are up nearly 800% since they bottomed in March and have more than doubled year to date.

While the company still has a promising future, today's sell-off seems reasonable given the strong growth recently, as well as the inventory-related headwinds and broader challenges from the pandemic.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.