Is the rally over for Carvana (NYSE:CVNA) stock? According to an expert short seller, the meme stock isn’t just overhyped but “insolvent” and “poorly run.”
Kerrisdale Capital has issued a damning short report, strongly calling the company’s growth prospects into question. This comes as CVNA stock has surged dramatically, presenting a complicated economic landscape for the auto retailer that many investors had written off. But even while it continues rising, seeing the big picture is more important than ever. Kerrisdale has conducted extensive investigations into other failing meme stocks, and this time around is no different. No matter how much it may have spiked recently, Carvana’s growth isn’t sustainable. The case for shorting CVNA stock has been strong for months, and its recent growth spurt doesn’t charge anything.
What does the investment firm see as the primary reasons to bet against Carvana, even in the face of a significant rally? Let’s take a closer look at the short report and its findings.
Time to Bet Against CVNA Stock
The recent rally can be attributed to Carvana’s recent improved outlook. Touting that it expected to post stronger profitability for per-car sales for the current quarter helped send CVNA stock up. However, as markets closed last week, the previous momentum seemed to be fading. While shares have rebounded today, their current trajectory is negative. It may be that the Kerrisdale short report is finally catching up with it, and for good reasons.
As the report notes, things haven’t always looked so dark for Carvana. In fact, the company enjoyed a key competitive edge during the Covid-19 pandemic when it operated in a market full of desperate buyers with few other options. However, as the firm notes, Carvana remained unable to turn a profit annually and now faces severe economic headwinds. On top of that, the company that initially sold itself as an industry disruptor hasn’t even come close. The field of flipping used cars remains a challenging market that Carvana couldn’t conquer. Per the report:
“Carvana’s fundamental fate was sealed last May. In an epic blunder, Carvana management misread the sustainability of pandemic-induced industry conditions and issued billions in high yield debt to finance the purchase of additional capacity, just as macro and industry conditions began choking demand. All these conditions persist today with few signs of improvement. Against this backdrop, Carvana pivoted abruptly from all-out growth to finally focusing on profitability, but it’s too little, too late. Carvana’s aggressive cost cuts may succeed in slowing the rate of cash burn, but with over $700m in annual interest expense and capex, it simply cannot generate enough profit to stop the negative cash flow.”
That’s just a small sample of what the Carvana short report contains. But it should serve as a comprehensive summary of the company’s many problems, all of which are good reasons to bet against it. As InvestorPlace’s Eddie Pan reports, Kerrisdale concludes that CVNA stock is “useless” and will end up trading at much lower levels.
A Short History of Bad Stocks
Kerrisdale is well known for producing these types of short reports. Last year it published a similar take on Digital World Acquisition Corp (NASDAQ:DWAC), a fellow meme stock that is down more than 18% year-to-date (YTD). During the same month, Fellow short-seller Hindenburg Research published an even more damning report on Mullen Automotive (NASDAQ:MULN), which has shed almost 100% of its value since then.
The underlying message is that when experts advise investors to bet against unstable meme stocks, it is often wise to listen. Kerrisdale is correct in its take on CVNA stock, just as it correctly predicted the decline of DWAC.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
