What happened
Shares of Carvana (CVNA 1.03%) were soaring today on an apparent short squeeze in shares of the struggling online seller of used cars, which could be approaching bankruptcy.
The stock was up 24% as of 11:16 a.m. ET on Wednesday.
NYSE: CVNA
Key Data Points
So what
The movement in Carvana comes as meme stocks like Bed Bath & Beyond, which is teetering on bankruptcy, and AMC Entertainment were rallying on a short squeeze, showing a coordinated effort to drive these stocks higher.
Carvana was not previously part of the group of meme stocks that first got attention on Reddit's WallStreetBets page, but its low price and high short-selling ratio seem to have attracted the interest of the same crowd.
As of Dec. 15, 80% of the float was sold short, meaning most investors are betting on the stock to go lower, even though it's already down more than 98% from its peak late last year. Its daily volume had also topped its 90-day average by 11:30 a.m. this morning, another sign of a squeeze.
Carvana is facing a cash crunch after used car prices plunged over the last several months, reducing the value of its inventory and forcing it to conserve cash. Last week, the company abandoned plans for a new $65 million inspection center in the Phoenix area, and also appears to be discounting the prices of its vehicles in order to clear inventory and raise cash.
Now what
Carvana's inclusion with the meme stocks adds a new element of intrigue to the stock, but investors should be wary of buying its shares simply because it's going up on a no-news short squeeze. Though meme traders have engineered skyrocketing returns before, these stocks eventually end up crashing without any fundamental improvement in the business.
With car prices still falling, things seem likely to get worse for Carvana in the near term, and bankruptcy is a very real possibility.
