Carvana Co. (NYSE: CVNA) was supposed to be bankrupt by now. Instead, its shares have made a modest comeback. However, its chance to survive still teeters on weak financials. (Click here to see the 25 biggest product flops of the past decade.)
Shares have had a miracle revival. They are still down 91% in the past year but have risen 78% in the past month. The jump has barely triggered a good outcome for people who invested a year ago.
Carvana has become a meme stock. Its rise has been based on speculation. A short squeeze may have hit short sellers who piled into the shares. In a vote of confidence, billionaire George Soros bought call options.
Carvana’s success is based on two core factors. One is used car prices. The other is the interest rates on car loans. Used car prices improved earlier this month, but they had dropped relentlessly for several months before. In another sign, people have begun to struggle with loans, and default levels have surged recently, particularly for subprime buyers.
Car loan interest rates were low for two years as the Federal Reserve promoted easy money. That has changed substantially as the central bank has tightened. That process will not change in the first half of this year.
One problem with the demand for used cars is that new inventory has improved due to better supply chains. New car prices are a primary catalyst for used car prices. Higher supply among new car brands is a bad omen.
Caravan’s earnings will be reported soon. No amount of speculative buying can change the effects of that. Carvana can prepare for a meeting with oblivion if the numbers are poor.
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