Carvana restructures debt, as its stock surges in dramatic 1,100% turnaround

Online used-car dealer Carvana Co. has brought windfall gains to its believers this year with a 1,100% rally as investors pile in amid a resurging appetite for riskier stocks.

Shares of the company jumped as much as 43% to $56.92 at the open in New York on Wednesday, after a deal to restructure its debt pile helped allay lingering concerns about its liquidity. Second-quarter revenue that beat analysts’ expectations are further bolstering the stock. They’ve since pared some of those gains but was trading around $54 a share. 

Carvana’s 2023 surge follows a 98% 2022 plunge that left shares trading below $5 at the end of December. 

The agreement with bondholders announced Wednesday will eliminate about 83% of Carvana’s 2025 and 2027 unsecured note maturities and lower required cash interest expense by $430 million a year for the next two years. The company expects to reduce its total debt outstanding by more than $1.2 billion.

The moves are breakthroughs in Carvana’s efforts to get a handle on its debilitating debt load, following an ill-fated expansion during the pandemic. The company borrowed billions of dollars to capitalize on surging demand for used cars, only for the market to slow recently amid higher interest rates and rebounding new-vehicle production.

The rapid rally marks a dramatic comeback for the company, though Carvana shares are still well below the record high touched in August 2021 at the height of the pandemic-driven stock-market boom. Some say the move is too extreme for a business that has yet to be profitable, and that it ignores the many risks still lurking in the used-car industry.    

“The action in Carvana is a sign that a bit too much euphoria is creeping into the marketplace,” Matthew Maley, chief market strategist for Miller Tabak + Co., said in an interview. 

“When some stocks see parabolic moves that are totally detached from their underlying fundamentals at a time when the stock market has become expensive, it’s a sign that a certain amount of froth has returned to the market.” 

In fact, higher-risk growth stocks that had fallen out of favor last year when investors were fleeing to safety in face of recession fears, a hawkish Federal Reserve and sticky inflation, have been back in vogue in recent months. At the same time, interest in stocks with a high short interest has returned as well. 

Carvana checks both those boxes. About 48% of the company’s free float is held short, according to data from S3 Partners. As of intraday Wednesday, Carvana shorts were down $2.1 billion in year-to-date mark-to-market losses.

And S3’s Ihor Dusaniwsky expects short sellers’ pain to get even worse amid Wednesday’s surge. 

“The Carvana short squeeze is going to tighten even more with today’s upward price action,” Dusaniwsky said. “Expect more short covering today and over the next few days as short sellers look for exit points to trim their exposure in a very unprofitable trade.”