Carvana (CVNA) has had nothing short of a remarkable and mind-boggling journey since first coming public in 2017.
The company gained fame for its eye-catching car-vending machines and promises to revolutionize the used car buying and selling process, and the stock parlayed that attention into a massive 3,200% run between late April 2017 and August 2021.
It was a darling of the pandemic-era bull market, but that momentum evaporated even more quickly than it appeared. From the 2021 peak to the stock’s December 2022 lows, shares lost 99% and the company faced the specter of bankruptcy.
But, seemingly miraculously, shares have gone on yet another incredible run, rising 309% in the last year and 3,942% from those 2022 lows.
But against that backdrop, allegations of borderline nonsensical accounting practices, self-dealing, exorbitant valuations and massive amounts of insider selling have simmered online – so much so that Hindenburg Research felt it necessary to call out in their latest short report, saying:
P.S. We want to thank the literally dozens of people who reached out to us, imploring us to look into Carvana, from the used car dealers and industry experts across the country to the average investors that sniffed out that something (or many things) weren’t quite right.
So, with Hindenburg Research answering the online call and finally taking a short position in Carvana, the question becomes: Should we join them?
We’ll explore the claims in more detail below, including one short-term catalyst that may present a short-selling opportunity, but first, a few notes.
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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 two 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 45% 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 Against Carvana (CVNA)
If you’re considering shorting Carvana, 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.
Now, as far as a short-term catalyst is concerned, the largest buyer of Carvana’s asset-backed securities (repackaged subprime loans) is Ally Financial (ALLY).
- 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.
But that agreement is in question…
- 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, the agreement is up for renegotiation:
- One Ally executive told us: “We’ve pulled back from them [Carvana] pretty significantly in 2024.” Ally’s Carvana purchase commitment extends to January 2025, posing a near-term risk to Carvana’s business model should it renegotiate on less-favorable terms.
So, with Carvana’s stock having already declined by 25% in the last month and with the short report and the potential Ally renegotiation, there are three short-term catalysts that lend themselves to a potential near-term short position in the stock.
Carvana tends to be a freight train of momentum, both higher and lower, and shorting the stock is a high-risk/high-reward proposition.
That said, the stars are aligning, so to speak, and offer a compelling case to follow Hindenburg Research here.
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