Short sellers play an important role in the market, and I do believe investors would do well to read through the bearish research provided on many names. Oftentimes, serious issues are uncovered, and investors are made aware of risks they may have been otherwise not privy to. However, Kerrisdale Capital’s recent short report on Carvana (NYSE:CVNA) has done little to put a dent in this high-flyer, with CVNA stock moving about 2% higher following the issuance of this short report this morning.
Kerrisdale announced its short position via an X post, to which numerous comments pointed out Kerrisdale had released a previous short report in July of 2023 below $20 per share. With CVNA stock now trading above $70 per share and investors unclear whether Kerrisdale covered their position, some desperation is being noted among those following this company.
Now, it may also be the case that Kerrisdale’s previous thesis holds, and this higher price simply warrants an even better entry point to short the stock. If there’s something to be uncovered with this company’s performance, the market will eventually get it right. So, let’s dive into this short report and the assertions made to see what we can make of this report and today’s reaction to the news.
CVNA Stock Moves Higher on New Short Report
Short sellers can often use short-term spikes in a given stock as opportunities to issue a short report in hopes of scalping some quick gains on a reversion sell off. However, this doesn’t seem to be materializing how many at Kerrisdale thought it would today, with retail investors clearly sticking behind Carvana and its better-than-expected results.
Kerrisdale asserts that Carvana does not have a bright path to profitability, is trading at a valuation multiple akin to artificial intelligence (AI) darlings, and has billions of dollars of high-yield debt (at as much as 14% interest rates). That’s a recipe for a disaster and could lead to an impending balance sheet crisis.
Kerrisdale appears to be arguing that Carvana can have profitability or growth, but not both. Accordingly, the company’s guidance for “slight” unit growth in the first quarter of 2024 may be worrisome, as are the company’s profitable results (which were driven by a one-off gain on debt extinguishment).
It appears to me that Kerrisdale has a point, and it’s entirely possible (perhaps likely) that CVNA stock is overvalued at current levels. However, the market is clearly making a judgment call that the company’s management team is turning things around, and doesn’t buy what Kerrisdale is selling. So, it will certainly be an interesting few months ahead for the stock. I’ll be keeping an eye on how Carvana performs and whether a potential short squeeze forms.
For now, retail investors are winning this battle, and it’s one that’s becoming more intriguing to watch.
On the date of publication, Chris MacDonald did not have (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.
