shares of CARVANA (CVNA 14.19%) surged higher today despite no news from the online auto dealership. Instead, investors reacted to the July Consumer Price Index (CPI) report, which cooled the inflation gauge to 8.5% yoy, unchanged from 9.1% in June and a better-than-expected 8.7%. .
It helped investors allay bearish fears and gave volatile tech stocks like Carvana a strong boost.
E-commerce stock ended the day up 14.2% Nasdaq jumped 2.9% and S&P500 grew by 2.1%.
Carvana is one of many growth stocks to fall over the past year as investors slumped onto unprofitable growth stocks. The online car dealer was no longer valued for its historically high growth, but treated as a potential bankruptcy. As a result, stocks have fallen 95% from highs to lows over the past 52 weeks.
The stock has staged a sharp comeback since bottoming on July 14 as investors believe it is now oversold. With it being priced in as a potential bankruptcy, there are fewer impediments for the stock to rise, and favorable macroeconomic news is a clear tailwind for Carvana.
Not only does falling inflation lead to a recession — it can also prevent the Federal Reserve from raising interest rates aggressively, which can allow interest rates to rise further. Higher interest rates make car loans more expensive, discouraging car purchases or causing people to trade them for cheaper options.
Carvana shares also plummeted, selling 47% of the free float, setting the stock up for a possible short squeeze — though that doesn’t appear to be the case today as trading volume was relatively light.
Caravana will need more than extensive financial help to make a full recovery. Growth has slowed significantly in recent quarters, and gross profit, a key metric for online car sales, is falling as the company capitalizes on falling used car prices. The way Carvana makes money from loans has also been jeopardized by rising interest rates as loan buyers grow more concerned about default.
Better profitability will help with these problems, but the company must eventually show it can turn a profit. However, on a price-to-sales basis of 0.6, the stock is cheaper, which means it can generate more profits if it can streamline the business and inflation continues to fall. Either way, expect volatility to continue.
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.