Hindenburg Research, a prominent short-seller, has disclosed a bet against Carvana, alleging that the company’s recent improvements are unsustainable and built on questionable financial practices. The report accuses the online used-car retailer of using unstable loans and accounting manipulations to create the appearance of a turnaround.
Allegations of Financial Irregularities
In a detailed report titled Carvana: A Father-Son Accounting Grift For The Ages, Hindenburg criticizes Carvana’s loan sales practices and highlights the relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, the company’s largest shareholder. The report claims that Carvana has engaged in $800 million of loan sales to a suspected undisclosed related party.
Hindenburg alleges these transactions, combined with lax underwriting standards, have temporarily boosted reported income but are not sustainable. Furthermore, the report accuses Carvana of granting loan extensions to avoid reporting higher delinquencies, a practice allegedly enabled by DriveTime, a private car dealership affiliated with Garcia II.
Carvana Denies the Claims
In response, Carvana dismissed the report, describing it as misleading and inaccurate. The company asserted that it has been one of the most scrutinized public companies since its initial public offering (IPO) in 2017. It emphasized its commitment to executing its business plan for the upcoming year.
Carvana’s statement also suggested that the allegations were similar to previous claims made by other short-sellers seeking to profit from a drop in the company’s stock price.
Stock Performance and Background
Carvana’s stock closed at $199.56 on Thursday, marking its first close below $200 since October and a decline of 1.9% for the day. The company’s stock surged nearly 400% in 2023, driven by cost reductions and improved financial performance under its turnaround plan.
The company went public in 2017 after spinning off from DriveTime, a dealership network founded by Garcia II. DriveTime originated from a bankrupt rental car business known as Ugly Duckling, which Garcia II transformed into a profitable operation.
Carvana continues to rely on DriveTime for services such as automotive vehicle financing and loan collections. The two companies share revenues from loans, occasionally sell vehicles to each other, and maintain profit-sharing agreements. Carvana also leases several facilities from DriveTime.
Past Legal and Financial Controversies
The Garcia family’s control of Carvana has faced criticism in the past, including lawsuits accusing them of running a “pump-and-dump” scheme to enrich themselves. Garcia II’s past legal troubles, including a guilty plea to bank fraud in 1990 related to the Lincoln Savings and Loan scandal, have also drawn scrutiny.
Hindenburg research report has reignited concerns about the company’s financial transparency and governance. The short-seller alleges that insiders have cashed out billions in stock while engaging in practices that undermine the company’s long-term stability.
Ongoing Investigations
The allegations raised by Hindenburg research add to the scrutiny surrounding Carvana’s financial practices and governance structure. Claims of accounting manipulation and undisclosed transactions with related parties raise questions about the integrity of the company’s reported financial performance.
While Carvana has denied the allegations and maintained that its turnaround efforts are genuine, the accusations may lead to further investigations and potentially impact investor confidence. As the situation unfolds, market observers and regulatory authorities will likely pay close attention to Carvana’s financial disclosures and governance practices.
