What happened
Shares of Carvana (CVNA 8.79%) dipped as much as 13.4% this week, according to data from S&P Global Market Intelligence. The online used car retailer didn't have any major business announcements. However, with major short interest, a broad market drop, and a tough news report about the company, it is not surprising shares fell so much this week. As of the market close on Thursday, Carvana stock is down 9% from last Friday's close.
So what
There are multiple reasons investors could have sold off Carvana stock this week. First, let's look into the recent news report about Carvana treating one of its customers poorly. The Boston Globe put out a story this week about a woman who Carvana reportedly bullied into paying a $2,000 fee after she bought a vehicle on its marketplace that immediately broke down. While it was only a small story and probably not indicative of how every transaction goes on Carvana, treating customers poorly is never a good look. If this becomes a recurring theme, it could be bad news for Carvana as it tries to disrupt the used-car retail market.
Second, it is possible Carvana moved lower because of the high short interest on the stock. It is estimated that 25% of Carvana's float is sold short -- a high percentage of its total shares outstanding. Highly shorted stocks can have significant volatility. Over the last month, with Carvana's stock soaring as much as 100%, it is possible shares were going through a short squeeze in which short sellers were forced to buy back Carvana shares at higher and higher prices. This week, it looks like the short squeeze is over, with Carvana shares giving up some of these gains. Shares are still up over 50% in the past month.
Lastly, we can attribute some of Carvana's moves this week to a dip in the broad market. At one point in the last five trading days, the Nasdaq 100 Index was down almost 5%, which likely had an impact on Carvana's share price.
Now what
Regardless of what the stock does in the short term, investors should focus on Carvana's underlying business and whether it has a sustainable model that can work over the long run. Running a used car marketplace is highly capital-intensive, and Carvana has never consistently generated positive free cash flow. In fact, over the last 12 months, it has lost around $2.67 billion in free cash flow.
CVNA Free Cash Flow data by YCharts.
This could change at some point in the next few years. But with so much cash-burning right now, investors should stay away from Carvana stock unless they are comfortable taking on a lot of risk with their portfolio.
