The online car retailer, Carvana, experienced a significant rally that now appears to be just a temporary blip. The company’s shares soared by an impressive 56% in a single day, driven by promising expectations of $50 million in adjusted EBITDA for the current quarter, largely due to improved per-car sales profitability.

While Carvana enjoyed the sudden gains, it marked a reversal of fortune for a company that saw its stock prices dwindle from the lofty heights of $360 in 2021 to single digits. Despite briefly reaching $25 per share following the profit update, Carvana’s shares closed at $19.07, erasing much of the recent gains.

Several factors contributed to this downward turn. Carvana’s mounting debt and declining revenue, coupled with a lukewarm response from industry analysts, overshadowed the company’s positive profit projections. Concerns also arose that the improved profitability was merely a one-time occurrence.

GreyJournal and other analysts pointed out that Carvana’s increased profitability was accompanied by falling revenues. Market predictions indicate that Carvana is expected to report revenues of $2.57 billion and $2.63 billion for the second and third quarters, respectively. These figures pale in comparison to the corresponding revenue results of $3.88 billion and $3.39 billion in the same quarters of 2022.

Carvana faces significant challenges as a heavily indebted company, with long-term debt exceeding $6.5 billion as of the first quarter. Despite generating a few hundred million in gross profit per quarter, the company reported a negative operating cash flow of $66 million in Q1 2023, indicating a difficult road ahead.

Founded in 2013, Carvana positioned itself as the “first complete online auto retailer,” eliminating the physical overhead associated with traditional dealerships and leveraging consumer-friendly technology. In 2015, it ventured into physical retail spaces through innovative “car vending machines” and subsequently secured substantial equity and debt financing while acquiring startups like Car360 and Adesa. However, Carvana has yet to achieve sustained profitability.

Although the improved per-sale profitability and adjusted profits for the second quarter were initially met with enthusiasm from investors, it remains uncertain if Carvana’s long-term prospects have transformed enough to justify a comprehensive reassessment. Today, a more cautious outlook seems to prevail.

Nevertheless, Carvana’s stock price, at around $19 per share, still represents an increase of nearly one-third compared to its pre-announcement level. Regardless of the fluctuations, it can be considered a win for the company in the short term.