Carvana: cash out or hold tight?

Year-to-date shares of the nationwide used car dealer Carvana (NYSE: CVNA) are up a staggering 1,054%. Yes, you read that right, 1,054%. That unbelievable surge puts the automotive dealer shares in the top percentile of performing stocks across all major U.S. exchanges. 

Now, if you’re wondering whether or not the company’s earnings were the cause of its impressive share performance, you might be surprised. While the company previously reported a substantial earnings beat, another factor might have equally resulted in the stock surge. It’s short interest. 

However, with the stock posting monumental gains in 2023, is now the optimal time to ring the register, or should you continue to hold in hopes of even more significant gains? Well, let’s take a closer look at the factors at play.

Carvana recently posted an earnings surprise

Carvana surged by as much as 12% following its latest earnings release in November as it unexpectedly reported an adjusted profit despite a decrease in the number of units sold year over year. 

Carvana's adjusted earnings per share stood at $3.60, surpassing estimates for a loss of $0.78, while revenue aligned with expectations at $2.77 billion. Notably, the company's total gross profit per unit (GPU) soared by 70% yearly, reaching a record high of $5,952. Despite a quarterly increase in units sold compared to the prior quarter, the year-over-year figure declined by 21%. CEO Ernie Garcia highlighted expectations for a further drop in retail units sold due to industry and seasonal patterns. 

Carvana's strategic shift toward profitability, marked by layoffs and cost-cutting measures last year, contrasts its previous growth trajectory during the pandemic. The company, which faced bankruptcy speculation in December 2022 with shares hitting a 52-week low of $3.55, now appears to be navigating challenges while focusing on achieving financial stability amid evolving market conditions and uncertainties. 

CVNA has attracted significant interest from short-sellers

The stock’s relentless and remarkable surge higher has not scared off the short-sellers, as the short interest remains exceptionally high at 38.71%, according to NYSE. A short interest of that scale makes the stock one of the most heavily shorted names on the NYSE.

On top of the bearish sentiment expressed by the magnitude of short interest, analysts also remain bearish on the stock. Based on thirteen analyst ratings, the stock has a Reduce rating and price target of $37.27, forecasting almost 32% of downside. However, the sentiment might slowly change, as financial giant JPMorgan Chase upgraded the stock from underweight to neutral earlier in the month and raised its price target from $25 to $40, predicting an almost 14% upside. 

Time to ring the register?

Shares of CVNA recently took out a critical level of resistance near $55 before making a new 52-week high. After trading over $60 momentarily, the stock has since retraced to the previous breakout level. 

Going forward, it will be vital to see whether or not it can successfully turn previous resistance into support and base over $55. If successful, the elevated short interest and firm bid might result in continued upside momentum. It’s also worth noting that despite its remarkable gains YTD, the stock has not yet been overbought according to its RSI of 67.28.