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Carvana Rides High Amidst Shifting Tides of Fortune

Carvana (CVNA), riding on the waves of changing consumer behavior during the Covid-19 pandemic, witnessed a surge in its stock prices, hitting an all-time closing high of $370.10 per share in August 2021.

Bolstered by stimulus money and low-interest loans, customers flocked to purchase cars, buoying the company's prospects.

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However, rising interest rates and escalating debt soon sent Carvana's stock prices, and the fortunes of individuals like the Garcias, into a downward spiral. This downturn prompted the company to scale back on ad spending and vehicle inventory. Despite the setback, Carvana saw a glimmer of hope in the first three months of 2024, marking the first growth in vehicle sales in six quarters and propelling revenue to $3.1 billion.

Nevertheless, challenges loom large for Carvana, with over $6 billion in debt and rising interest payments on restructured loans still on the horizon.

While the company has seen improved fortunes of late, both father and son Garcia have capitalized on the surge in share prices to offload some of their stock. The elder Garcia sold $12 million worth of stock this year, while his son disposed of less than $1 million.

Carvana's First Quarter Triumphs
Carvana's first-quarter earnings report surpassed expectations, with earnings per share standing at $0.23, beating the FactSet Consensus by $0.90. Revenues surged 17.5% year-over-year to $3.06 billion, outstripping the FactSet Consensus of $2.7 billion. The company recorded retail unit sales totaling 91,878, marking a 16% increase, while total gross profit per unit ("GPU") soared to $6,432, an increase of $2,129. Adjusted EBITDA margin witnessed a significant boost to 7.7%, up from (0.9)%.

Anticipating a Strong Second Quarter
Looking ahead to the second quarter of 2024, Carvana anticipates a sequential increase in year-over-year growth rate in retail units and Adjusted EBITDA, provided the environment remains stable. With robust results in the first quarter and an optimistic outlook for the second quarter, Carvana expects to comfortably deliver on its outlook of year-over-year growth in retail units sold and Adjusted EBITDA for FY 2024. The company plans to focus on quarterly commentary moving forward, refraining from providing additional updates on the full year 2024.

A Surge in Short-Seller Losses
The surge in Carvana's stock prices on Thursday added to the woes of short sellers, who have incurred significant losses as the used car retailer's shares rebounded over the past year. The 40% jump in share prices, following a better-than-expected first-quarter earnings release, extended short-seller losses to $3.9 billion, with Thursday's move alone costing the group more than $860 million in paper losses.

Navigating Through Challenges
Carvana's upward momentum marks a new chapter for the company after enduring a rough patch in the post-Covid rout of 2022. Despite the gains over the past year, Carvana still trails its all-time high close of $370 in August 2021. The company continues to grapple with mixed sentiments from Wall Street, with only four buy ratings, 17 holds, and three sells, according to data compiled by Bloomberg. The average analyst price target of approximately $90 suggests more than 20% downside from current share prices.

An Optimistic Outlook
Despite the uncertainties, analysts have grown increasingly bullish on Carvana after its stellar earnings beat. JPMorgan analysts upgraded Carvana to overweight from neutral and raised the price target to $130 from $70, citing continued rapid progress on all fronts. Analysts at William Blair also raised their 2024 adjusted earnings estimate by more than 60% to nearly $1 billion, anticipating significant margin expansion that could position Carvana uniquely in the automotive retail landscape.

Amidst these developments, Carvana's journey remains dynamic, with investors closely monitoring its trajectory and the evolving landscape of the automotive industry.

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