This year, the best-performing stock is not one of the big tech companies that have sparked much debate about the stock market recovery in 2023, but it is Carvana, a used car dealer that filed for bankruptcy – even though this year’s stocks are still far from their pandemic peak.
Key Facts
Carvana’s stock has soared by more than 1000% this year, making it the biggest winner among all companies listed in the Russell 3000 index, which tracks most publicly traded U.S. stocks.
This is roughly double the return of the second highest riser, Bitcoin mining company Marathon Digital, which has seen an increase of nearly 600%, easily outperforming the Russell 3000 and the more closely watched S&P 500 index, which rose 25%.
The rise in Carvana’s stock came while the company faced concerns that it would be forced into bankruptcy as its cash losses mounted, as it agreed to restructure its debt and reported positive cash earnings for the first quarter of 2023.
However, Carvana’s stock price remains below $54, which is about 86% lower than its peak of $377 in 2021, and analysts are not convinced that the company will regain its former glory, with the average price target for Carvana’s stock being $37 according to FactSet.
Main Background
Carvana, which went public in 2017, enjoyed a massive surge in its market capitalization as demand for used cars rose, with its market value rising from $5 billion in February 2020 to $31 billion in August 2021.
But demand fell and there was a massive shift in general market conditions, including a sharp rise in interest rates that made consumer auto loans much more expensive, leading to Carvana’s downfall. The company’s shares plummeted to a low of $3.55 in December 2022 due to a loss of investor confidence from a series of controversies, including mass layoffs, insider stock sales, and, most notably, a mountain of debt.
Carvana had been suffering from negative cash flow in every quarter it operated as a public company until 2022, generating about $8 billion in negative free cash flow during that time. Concerns escalated regarding Carvana’s ability to avoid defaulting on its debts last December, when Bloomberg reported that the company’s creditors had agreed to form a unified front in their dealings with Carvana.
Remarkably, Carvana seems to be coming out of that crisis, announcing in July that it had reached an agreement to reduce its debt by $1.2 billion and posted its first-ever profit in the third quarter of 2023, achieving profitability despite an annual revenue decline of 18% as operating expenses decreased.
Interview
Although Carvana has avoided the worst bankruptcy scenario, Wall Street remains far from convinced that the car dealer’s stock will see further gains. It is one of the most shorted stocks, with about 35% of its traded shares being sold short betting on a decline in the stock price.
Important Quote
“While Carvana seems to be correcting its errors during the pandemic, it has an ‘uncertain timeline for returning to growth,’” wrote Deutsche Bank analyst Emanuel Rosenberg in a client note last month.
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The stocks achieved the biggest gains during the rally of the leading financial market
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