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Investors flocked to the online car-selling company Carvana (CVNA -4.92%) today after Federal Reserve Chair Jerome Powell said yesterday that the Fed will likely make a smaller interest rate increase in December compared to its past meetings.
Carvana’s business is especially sensitive to interest rates, so an indication that rate increases will be less severe could be a good thing for the company. Still, there’s lots of uncertainty surrounding this stock right now.
Carvana’s share price was up by 6.2% as of 2:29 p.m. ET Thursday.
Speaking at the Brookings Institution yesterday, Powell said that “The time for moderating the pace of rate increases may come as soon as the December meeting.”
Image source: Getty Images.
Powell tried to strike a balance with his comments, reiterating that more still needs to be done to fight inflation while also indicating that recent interest rate hikes need time to work through the economy.
He added that “… it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.”
Carvana investors are enthusiastic about Powell’s comments because the Fed’s interest rate increases have raised the borrowing costs for consumers looking to purchase vehicles. The interest rate increases have impacted Carvana’s business and have also made it more expensive for companies to borrow money to invest in new growth.
Carvana is currently burning through cash, and an increasing number of analysts have downgraded the company’s stock recently. Just yesterday, Bank of America Securities analyst Nat Schindler downgraded Carvana’s stock rating to “neutral” from “buy” and said, “We now believe that without a cash infusion, Carvana is likely to run out of cash by the end of 2023.”
While some investors are taking Powell’s comments as a clear sign that Carvana’s stock could turn around, that may be an overly optimistic approach.
Carvana is still hurting from rising interest rates and is spending significant cash to keep the company running. Even if the Federal Reserve makes smaller interest rate increases at its future meetings, that doesn’t mean Carvana’s business will completely turn around.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Chris Neiger 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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