What happened

Carvana (CVNA 8.79%) stock has been on fire in recent weeks, and not even a short-seller note could slow it down today.

Shares of the online used car dealer gained 11.5%, as it seemed to benefit from an ongoing short squeeze and gains in the broad market on Monday.

So what

Kerrisdale Capital, a short-seller who hammered C3.ai stock just months ago, set its sights on Carvana, the struggling used car dealer.

Kerrisdale said it was short the stock in a note this morning, and predicted that the company would never deliver sustainable positive cash flow until it converts its debt into equity. The short-seller said, "Liquidity will drain further, and Carvana will be staring at over $250 million in interest payments in the fourth quarter, its seasonally slowest period."

In spite of the attack, Carvana shares still rose on high volume, with 52 million shares changing hands, more than double the 90-day average. That's a sign that investors were again squeezing short-sellers, who have bet against the stock en masse due to its weak balance sheet and financial position.

As of the end of May, 69% of the stock had been sold short, setting up the opportunity for an extended short squeeze.

Now what

Carvana shares surged last week as the company said it would deliver adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of more than $50 million in the quarter. This was much better than expectations, though the forecast seems to have come from the sale of receivables it had held off selling earlier, which could be just a one-time gain.

It won't be fully clear how the underlying business is performing until the full second-quarter earnings report comes out in August, but the company did take steps in the right direction in its first-quarter earnings report. 

Still, with nearly $7 billion in debt, Carvana needs to deliver positive free cash flow in order to take bankruptcy off the table.

Though Kerrisdale seems to think that won't happen, Carvana bulls are still bidding up the stock. Even after its recent rally, the upside potential is considerable if the business continues to recover.