Carvana accused of shady practices in Hindenburg report

Carvana’s post-pandemic strength is being challenged in a new report from investment analysis firm and short seller Hindenburg Research.

Driving the news: The report, titled “Carvana: A Father-Son Accounting Grift For The Ages,” calls the auto retailer’s recovery from near-bankruptcy a “mirage,” fueled by the company’s lending practices.

• Hindenburg claims that Carvana has generated revenue by selling off risky (subprime and below) auto loans. In one instance, the firm claims to have found a loan sale worth $800 million to “a suspected undisclosed related party.”

• About 26% of the retailer’s gross profit since last April has allegedly come through similar loan sales.

• This, along with “accounting manipulation and lax underwriting” has allegedly boosted Carvana’s income growth and helped drive its stock price up roughly four times what it was worth in 2023.

• It also accused the retailer’s loan servicer, DriveTime, of providing loan extensions in an effort to keep delinquencies low. DriveTime is run by Ernest Garcia II, the father of Carvana CEO Ernest Garcia III and the company’s largest shareholder.

Zooming in: Carvana dismissed the accusations in the report, which it called “intentionally misleading.”

• The company said Hindenburg was attempting to profit from a decline in its stock price (also known as shorting the stock).

• In response to Hidenburg’s allegations, JP Morgan analysts said that their own investigations into Carvana in 2019 and 2022 have “not flagged red flags, particularly regarding gain on sale accounting and the underlying FCF [free cash flow] generated by the business.”

• However, the firm did criticize the retailer’s lack of disclosures surrounding its finances.

Zooming out: Carvana has faced similar allegations in the past. Among dealers, one of the brand’s most frequently challenged claims is its gross profit per retail unit, which has trended well above average compared to the rest of the industry.

• Carvana’s CEO has defended the high returns by pointing to the company’s integrated business model, which includes financing and wholesale operations.

• However, Hindenburg also challenges this claim. In Q3 2024, Carvana claimed a gross profit per unit of $3,497.

• The firm said Carvana inflated this value by roughly 35% “by dumping an estimated $390 million of selling costs into SG&A [selling general and administrative] annually, in stark contrast to accounting practices at competitors.”

Bottom line: In a statement, Carvana said it would continue to follow through on its plans for 2025, ignoring Hidenburg’s challenge. The company’s stock price trended down roughly 2% on Thursday following the report’s publication.

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