What happened
Shares of Carvana (NYSE: CVNA) jumped today, even though there was no news out on the online auto retailer. Instead, investors seemed to be reacting to the July Consumer Price Index (CPI) report, which showed the inflation gauge cooling to 8.5% year over year and flat over June, down from 9.1% in June, and better than expectations of 8.7%.
That helped assuage investor fears of a recession, and gave volatile tech stocks like Carvana a strong boost.
The e-commerce stock finished the day up 14.2%, while the Nasdaq jumped 2.9% and the S&P 500 gained 2.1%.
So what
Carvana is one of a number of growth stocks that have plunged over the last year as investors have turned sour on unprofitable growth stocks. The online car dealer has gone from being valued based on its historically high growth to being treated like a potential bankruptcy. As a result, shares fell 95% from its high to low over the last 52 weeks.
Since hitting bottom on July 14, the stock has rebounded sharply, as investors seem to believe it's now oversold. Because it's being priced as a possible bankruptcy, there's a low bar for the stock to move higher, and favorable macroeconomic news is a clear tailwind for Carvana.
Falling inflation not only staves off a recession -- it could also disincentivize the Federal Reserve from continuing to make aggressive rate hikes, which would keep interest rates from continuing to go up. Higher interest rates make car loans more expensive, so they disincentivize car-buying or cause people to trade down to cheaper options.
Carvana shares are also heavily shorted, with 47% of the float sold short, setting the stock up for a potential short squeeze -- though that doesn't seem to be what happened today, as trading volume was relatively low.
Now what
Carvana is going to need more than a macroeconomic assist to make a full recovery. Growth has slowed significantly in recent quarters, and gross profit, a key metric in online car sales, is falling as the company seems to be getting pinched by declining used car prices. The way Carvana makes money on loans has also been jeopardized by rising interest rates, as debt-buyers have become more fearful of defaults.
An improving economy will help with those problems, but the company will eventually need to show it can make a profit. However, the stock is cheap based on a price-to-sales of 0.6, meaning there's more upside to it if it can streamline the business and inflation continues to fall. Either way, expect the volatility to continue.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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