Carvana (CVNA) was one of the biggest winners of the frenzied post-pandemic market.
After gaining frame for its multi-story “car vending machines,” the stock went on a massive run, rising 3,200% between April 2017 and August 2021.
But, seemingly overnight, those gains evaporated.
From that peak to the December 2022 trough, shares fell 99% amidst rumors of potential bankruptcy.
Remarkably though, not only has the company survived, but it’s thriving. And the stock has followed suit.
Shares are higher by more than 400% in the last year and more than 5,000% since the December 2022 bottom.
But against that backdrop, allegations of deceptive accounting practices, self-dealing, exorbitant valuations and massive amounts of insider selling have swirled online – so much so that Hindenburg Research felt it necessary to call out the repeated requests for coverage in their latest short report.
Carvana was one of the most-requested short targets for Hindenburg and, in light of the recent announcement that the firm is closing up shop, their last.
So, with Hindenburg Research answering the online call and making Carvana their swan song, the question becomes: Should we join them?
We’ll take a closer look at the report below, but I’d first like to offer some caveats.
First, I’ve never purchased a vehicle through Carvana or used them to secure financing (a core element to many of the criticisms Hindenburg has levied against them), but I have sold vehicles to the company.
From personal experience, the process is flawless. They offer top dollar (thousands of dollars more than dealerships and more than competitor CarMax), you can initiate the process with a few taps of your smartphone, and, if you don’t feel like driving to their vending machine/lot, for a nominal fee they’ll pick the car up at your home.
Ten out of ten experience; highly recommend.
Second, Hindenburg Research is not perfect. We’ve previously covered their short report on Roblox (RBLX) and found that it missed the mark (many of their claims failed to understand the state of user-generated content, their revenue model, and, frankly, how the internet functions for users these days). Roblox stock has risen 62% since the short report was published in early October.
In the case of Carvana, however, you can count me among the group of investors who suspected something didn’t quite add up at the company.
Hindenburg’s Allegations
If you’re considering shorting Carvana (which has actually risen 15% since the report was published), I highly recommend reviewing the full short report. It goes into far more detail than this article.
But, in summary, there are three core allegations, each followed by a supporting excerpt from the short report.
1. Carvana’s subprime lending practices are a growing and existential risk to the company.
After calling off an earlier agreement in principle with Carvana around 2019, a Wells Fargo senior manager told us: “As we dug into it, the more we learned, the less we liked about it.” They cited specific concerns about lax underwriting and related-party loan servicing.
2. The company’s accounting practices are structured to convey the appearance of more robust growth than actually exists.
With its market collapsing, Carvana has propped up its numbers through a grab bag of related-party accounting games.
For example, Carvana’s increase in borrower extensions is enabled by its loan servicer, an affiliate of private car dealership DriveTime, run by Carvana’s CEO’s father. The company seems to be avoiding reporting higher delinquencies by granting loan extensions instead.
In another example, in 2023, $145 million of “other revenue” or ~8.4% of gross profit came from related parties. This included $138 million of commissions and profit-share from DriveTime.
3. One of the primary goals of the company is to facilitate massive amounts of insider selling by the father of the CEO.
Previously, Carvana CEO Ernie Garcia III’s father, Ernest Garcia II, sold $3.6 billion in stock between August 2020 and August 2021. In the year after he stopped selling, Carvana’s stock plunged 99% and faced bankruptcy concerns shortly thereafter.
Since 2023 we see the same trend: Carvana has touted a bright future and posted three consecutive quarters of modest positive net income, an aggregate of $245 million, despite stress in the used auto market.
For every $1 in net income it reported, the company has added $139 in market cap – a $34 billion market cap increase. With Carvana shares up ~42x, father Ernest Garcia II has sold another $1.4 billion in Carvana stock.
These are just brief examples of the allegations, but given the corresponding (and remarkable) share price growth, it’s hard to argue against the short case against the company.
However, one of the core theses of the report is the arrangement with the largest buyer of Carvana’s asset-backed securities (repackaged subprime loans), Ally Financial (ALLY), which was up for negotiation and in question at the time Hindenburg published their report:
- Carvana has relied on a purchase commitment agreement with Ally Financial, to which it sold $3.6 billion of vehicle loans in 2023, ~60% of its total originations.
- Carvana has told investors for at least 6 years that it is seeking to diversify outside of its relationship with Ally, but thus far has not announced new financing partners.
- As subprime auto has declined, Ally has amended its arrangement with Carvana 5 times in the last two years. Each time, Carvana redacts crucial information that would help investors understand the terms of the relationship.
- Over the last 2 years, Ally’s loan book has become increasingly concentrated, with Carvana loans rising from 5% of its consumer auto portfolio to 8.4%. In September 2024, Ally’s stock fell 20% after warning investors that “on the retail auto side, our credit challenges have intensified”.
Notably, however, the agreement was recently renegotiated, which removed a potentially significant near-term short catalyst.
This leaves the short potential for Carvana in the same position that it’s been in for much of the company’s trading history: a frustratingly enticing high-risk/high-reward proposition.
And with Hindenburg closing up shop, Carvana, it seems, will have the last laugh.
