What happened
Shares of online-focused used car dealer Carvana (CVNA 0.84%) jumped this week. The stock rose as much as 36.1% at one point but finished the week up about 19% as of 2:40 p.m. ET, according to data from S&P Global Market Intelligence.
The stock's gain builds on momentum that started gaining traction after the company said in a Jun. 8 press release that its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for its second quarter were trending higher than the company had previously forecast.
NYSE: CVNA
Key Data Points
So what
Carvana stock has traded with lots of volatility this month. Overall, however, the trend has been up. Shares are up about 60% month to date. Investors have been applauding Carvana's attempts to improve profitability after Carvana said earlier this month that its adjusted EBITDA for Q2 is now expected to come in at $50 million.
"The team's persistent focus on driving profitability has resulted in significant savings and efficiencies, and this work will persist as we continue to execute our plan," said Carvana founder and CEO Ernie Garcia in the company's Jun. 8 press release.
The stock's volatile trading this week comes as investors try to digest the revised outlook and subsequently attempt to properly value the stock.
Part of the upward momentum in the share price could also be a short squeeze, or a rapid rise in a stock price as traders who are shorting the stock cover their positions.
Now what
Despite the stock's strong momentum, investors would be wise to remain skeptical. First, investors should note that it's not $50 million of earnings in Q2 that Carvana is expecting but rather $50 million of adjusted EBITDA. The difference between the two is significant and has material financial implications. Second, investors should keep in mind that Carvana still isn't generating positive free cash flow. Finally, it's not like Carvana's shares are cheap. The stock's approximately $4.5 billion market capitalization despite its negative cash flow is nothing to laugh at. There's very little room for error in the market's current expectations for this stock.
