Advance Auto Parts Jumps on Surprise Earnings Beat

Key Points

• AAP stock soars over 53% after the company beat on earnings and maintained its full year guidance despite tariff uncertainty.
• The surge in the stock is being fueled by a short squeeze, which may limit upside momentum.
• Overbought signals and high valuation suggest now may be a smart time for investors to trim their positions.

Advance Auto Parts Inc. NYSE: AAP is giving investors a big, beautiful return of over 50% after the company reported a double beat on earnings. The auto parts retailer also said it maintained its full-year forecast despite the uncertain tariff outlook. As of noon on May 22, AAP stock was up 53.5%. If the gain stays above 16.6% by the close, it will be a record day for the stock.

The company was expected to report negative earnings per share (EPS) in the quarter, and it did. However, the loss of 22 cents was much better than the negative 77 cents forecasted by analysts.

On the top line, revenue of $2.58 billion was down year-over-year (YOY). However, it beat analysts’ forecasts of $2.51 billion.

The news wasn’t all good. Comparable store sales, a key metric for retail stocks, were down about 0.6%. That was, however, better than the –2% that some analysts were expecting.

As impressive as the stock price surge is, it may be more about short interest. There’s also evidence that the company’s turnaround plan works, but the stock may quickly reach overbought levels.

Tariff Troubles Appear to be Manageable

Like its competitors, AutoZone Inc. NYSE: AZO and O’Reilly Automotive Inc. NASDAQ: ORLY, Advance Auto Parts has a global supply chain that includes products from Mexico, Canada, and China. However, the company pointed out that tariff uncertainty is likely to impact consumers’ decisions to buy new cars.

That will be bullish for auto parts as consumers will begrudgingly pay higher prices if they can keep their current vehicle on the road longer.

Before the earnings report, Advance Auto Parts announced mitigation efforts in anticipation of tariffs. These included closing some underperforming stores, which has positively impacted the company's balance sheet.

That’s why it affirmed its outlook for full-year adjusted EPS between $1.50 and $2.50 and net sales from continuing operations of $8.4 billion to $8.6 billion.

The guidance assumes that the current level of tariffs will remain in place for the rest of 2025.

Short Interest Is At Play

In the past month, short interest on AAP stock has dropped by over 3%. However, heading into earnings, it was still around 17% (i.e., about 10 million shares). Furthermore, covering those short positions would take investors over four days. Some short covering is likely a reason for the parabolic move in AAP stock.

Short sellers have driven the company’s stock price lower this year. But heading into earnings, analysts were keeping their price targets well above the stock’s current price, even as they lowered their price targets.

This May Be a Time to Trim Your Position

Investors who bought the dip in AAP stock should take a well-deserved bow today. They’ve made a nice profit after this historic run. However, the Relative Strength Indicator for the stock has moved into overbought territory. That suggests that although this move has pushed the stock past its 50- and 200-day simple moving averages (SMAs), momentum may have peaked.

The post-earnings spike is also making the fundamentals look less attractive. Heading into earnings, AAP stock was already trading around 48x earnings. Now it’s more than 66x earnings, which may be too rich for many traders.

Analysts will weigh in in the next few days, but with the stock pushing past its 12-month estimates in one day, there appears to be ample downside risk. Trimming a position makes sense as the short interest gets wrung out of the share price.