What happened
Shares of Carvana (CVNA -0.17%) were revving higher again this week after the momentum from last week's strong second-quarter guidance continued. The stock rose even in the face of an attack from short-seller Kerrisdale Capital, and an extended short squeeze also pushed it higher.
As of 1:35 p.m. ET, the stock was up 41% for the week, according to data from S&P Global Market Intelligence.
So what
The biggest news out on the stock last week, ironically, was the short-seller hit from Kerrisdale Capital.
In a Twitter thread, the short-seller said that the used car dealer was insolvent and that the equity is worthless. It also argued that Carvana would never generate sustainable cash flow until its debt was converted to equity.
Kerrisdale made waves earlier this year after it wiped out nearly half of C3.ai's value with a similar screed, but the Carvana post had the opposite effect as the stock ripped higher Monday on what seemed to be another short squeeze.
The e-commerce stock finished May with 69% of its float sold short, meaning most investors are still betting for the stock to fall.
Kerrisdale didn't make a bad argument necessarily, but Carvana is already down more than 90% from its peak in 2021, and the business is showing signs of improvement, meaning investors see more upside than downside.
In a guidance update last week, management said it now expected to deliver adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $50 million. Though much of that profit seems to be due to selling receivables that had stayed on its balance sheet for longer than normal, it nonetheless shows the company moving toward being more solvent.
Additionally, used car prices have rebounded over the last two months, according to the Consumer Price Index, up nearly 10% in that time, which helps Carvana make a profit on its inventory.
The stock crashed last year in part because used car prices tumbled and interest rates rose, meaning the company was sitting on billions in depreciating inventory while it was getting more expensive for consumers to buy it.
Finally, the Federal Reserve's decision not to raise benchmark interest rates for the first time in more than a year also favors Carvana, though the central bank did say it expected to do more rate hikes later in the year.
Now what
Carvana still has a long way to go in order to repair its business and deliver a sustainable profit, but the first-quarter results and second-quarter guidance clearly show the company making progress and doing so faster than expected.
With hopes of a broader economic recovery sweeping the market, Carvana has a lot of upside potential if the business continues to move in the right direction.