What happened
Shares of Carvana (CVNA 0.82%) were soaring last month as the online used car dealer took a big step on its comeback trail by posting better-than-expected first-quarter results and guiding to an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit in the second quarter.
The update helped reassure investors that the stock would be able to avoid bankruptcy after plunging as much as 99% from its peak in 2021 on slowing growth and mounting losses, especially as interest rates rise and used car prices fell for much of last year.
According to data from S&P Global Market Intelligence, Carvana stock finished the month up 86% as a short squeeze seemed to carry the stock following the earnings report. As you can see from the chart below, the stock jumped on the earnings report and remained volatile from there.
So what
Carvana reported a sharp drop in revenue in its first-quarter earnings report, but that was by design as the company cut back on inventory in order to improve profitability. Revenue fell 25% to $2.6 billion, but total gross profit rose 14% to $341 million, and gross profit per unit jumped by more than a third to $4,303, showing a sharp improvement in the unit economics of the business.
Its EBITDA loss narrowed from $348 million to $24 million, and the company said it expected an adjusted EBITDA profit in the second quarter as the first step in its three-step plan to deliver positive free cash flow.
Following the earnings report, a short squeeze seemed to help boost the stock as shares are still heavily shorted following its crash last year.
Now what
From peak to trough, Carvana lost 99% of its value as used car prices fell, the company made an ill-timed acquisition of the ADESA auction business, and creditors began preparing for a bankruptcy.
However, the company's first-quarter earnings report showed investors that it can bring costs under control and significantly diminished the risk of bankruptcy.
The stock also popped yesterday after S&P Global raised its credit rating on a number of Carvana-securitization loans, showing that its auto loans are performing better than expected.
Carvana has a long way to go in order to be a healthy business, but if the company can continue improving the business, the stock will respond favorably.
