Carvana shares surge 46% after upbeat second-quarter outlook

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(Reuters) -Shares of used-car retailer Carvana Co (NYSE:CVNA) were up 45.6% on Thursday with some help from traders covering their bearish bets after the company forecast second-quarter adjusted earnings above Wall Street expectations due to cost-cutting initiatives.

Carvana shares rose as much as 51% during the session. They last traded at $22.61 with more than 61 million shares changing hands, after hitting an eight-month high.

Debt-laden Carvana said it expects to report second-quarter adjusted earnings before interest tax, depreciation and amortization (EBITDA) above $50 million. In May it had forecast a quarterly profit, but did not provide numbers until Thursday.

This EBITDA forecast exceeded consensus expectations for a loss of $6 million according to Stephens analyst Daniel Imbro, who had estimated EBITDA of $1.0 million-plus.

The Tempe, Arizona-based company said non-GAAP total gross profit per unit (GPU) would be above $6,000, a record for the company and an improvement of 63% from the year-ago quarter.

While sell-side analysts were impressed with the numbers, Thursday’s move also led to a short squeeze, which occurs when many investors bet that a stock will decline but its price shoots up instead.

“There’s going to be a good portion of that that’s likely due to shorts covering their positions,” said Ihor Dusaniwsky, head of predictive analytics at markets data provider S3 Partners. He estimated that roughly half of Carvana shares were sold short ahead of the company’s forecast.

Short sellers of Carvana were already down $596 million so far this year as of Wednesday, and with Thursday’s stock move they had lost $775 million on a mark-to-market basis, Dusaniwsky said.

Short sellers make bearish bets by borrowing securities for a fee and immediately selling them with an aim to repurchase them at a lower price in the future, then return them to the lender and pocket the difference.

Carvana has been trimming inventory and slashing advertising expenses to help move closer to profitability and attain positive free cash flow.

“We are impressed with Carvana’s ability to improve its non-GAAP operating metrics as the shift to profitability, while sacrificing growth, has realized benefits faster than we anticipated,” wrote Stephens’ Imbro.