What happened

Shares of used car e-commerce company Carvana (CVNA 0.44%) were down 38.5% in September, according to data provided by S&P Global Market Intelligence. Surprisingly, there were few fundamental changes to the business during the month despite the huge change in the price per share. Nevertheless, it did drastically underperform the market's negative 9% return.

So what

If anything, Carvana had relatively positive developments in September. For example, it was upgraded by an analyst on Sept. 12. According to The Fly, Piper Sandler analyst Alexander Potter called Carvana a "grossly undervalued" stock and gave it a price target of $73 per share. Typically, something like that can lead to a stock overperforming in a given month because it instills investor confidence.

Additionally, on Sept. 22, Carvana announced that its credit arrangement with Ally Financial had been increased and lengthened, giving the car company more liquidity and a longer period to use it. The credit arrangement helps Carvana manage its used car inventory, so this can also be seen as positive news.

However, two things contributed to Carvana stock's underperformance in September: One is business related while the other is stock related. Starting with the business-related drag, competitor CarMax reported financial results and reported a drop in the total number of vehicles it sold. Therefore, it seems like the used car market is slowing down. And the market didn't like the implications for Carvana.

Regarding the other issue, Carvana stock has a very high beta of 2.6 as of this writing, according to Yahoo Finance. This basically means that, based on historical performance, investors should expect Carvana stock to swing about 160% more than the market. For example, if the market drops 10%, Carvana shareholders shouldn't be surprised for a 26% plunge. 

For what it's worth, beta works both ways. If the market surges to end 2022, expect Carvana stock to do even better during periods free of fundamental changes to the business.

A high beta is common for companies with a wide range of potential outcomes like Carvana. The jerkiness of the stock price reflects investors' doubts about the company's long-term ability to create value. And since the market dropped 9% in September -- suggesting a weakening economy overall -- investors seemed less inclined to purchase shares of a company like Carvana that's perceived as more risky, contributing to its 38.5% drop.

Now what

It bears noting that CarMax's struggles won't necessarily carry over to Carvana. We'll simply have to wait for Carvana to report results for its third quarter, which will likely come in November. 

When Carvana reports next, investors should watch metrics related to management's top three priorities: Grow the top line, Increase gross profit per vehicle, and Gain operating leverage.

While operating leverage is hard enough, the first two priorities will be difficult in the current environment. CarMax's results suggest the market is cooling -- a headwind for Carvana. And used car prices are falling, which could hurt the company's gross margin. If management finds ways to overcome both challenges in this market, it may be a strong sign that Carvana is a powerful brand with pricing power, which would be great news for shareholders.