Carvana Is Cooking Its Books, Hindenburg Research Claims

Caravan can be a house of cards. That’s according to investment research and activist short-selling firm Hindenburg Research (it’s never a good sign to be the subject of outrage from a company named after a famous disaster), which released a report on Thursday It accused the online used car seller of “accounting manipulation” stemming from troubled debt that it is using to temporarily shore up its prospects while its father-son ownership group cashes out.

The report is titled “Carvana: Father-Son Accounting Grift Through the Ages” claims Carvana’s miraculous turnaround over the past two years, which has seen the company’s stock About 10 times in 2023 and climbing another 300% After 2024 Looking at bankruptcy in 2022Nothing more than a “mirage”. Hindenburg Research claims that as the share price skyrocketed, Carvana’s CEO’s father cashed out more than $1.4 billion in stock.

There seems to be something self-serving at the center of the alleged scheme, but to understand the alleged shadow, it’s important to first understand how the business model works.

When people buy a car from Carvana, a loan comes from the retailer, but then it sells those loans to another company. Its initial buyer for that auto loan was Ally Financial, but the bank backed out of its partnership. This may be in part because Carvana’s underwriting practices on those loans have historically been questionable. Hindenburg notes that Wells Fargo—a company that has dominated the industry deceptive financial transaction— canceled a partnership with Carvana in 2019 because “their underwriting practices weren’t something we felt particularly comfortable with.”

What exactly happens in Carvana’s underwriting process? Basically, a rubber stamp, according to reports. “We actually approved 100% of the applicants that we didn’t reject for compliance reasons,” a former director of Carvana told Hindenburg. About half of all Carvana’s loans are subprime, per Hindenburg, and 80% of those are “deep subprime,” the riskiest rating available. Even the company’s so-called “prime” borrowers have a 60-day delinquency rate four times the industry average.

All that to say, Carvana car loans are a big risk. Yet the company found a new buyer for them even as Ally and others turned away. According to Hindenburg’s research, Carvana sold $800 million in auto loans to what the company called “unaffiliated third parties.” The thing is, though, Hindenburg doesn’t consider this buyer “unrelated.” The firm believes Carvana is selling its debt to an affiliate of Drivetime, a privately held car dealership owned by Ernest Garcia II — the father of Carvana CEO Ernie Garcia III and the car dealer’s largest shareholder.

Hindenburg believes that the loan servicer is granting loan extensions to its borrowers to show that more of the company’s loans are in good standing when they would otherwise be considered delinquent and risky.

So according to Hindenburg’s digs, it seems that Carvana made her incredible change by simply approving every loan request that came across her desk. These juiced sales and investors rallied behind the company, pushing its stock price to new highs. Meanwhile, Ernest Garcia II began selling his stock, pocketing more than a billion as the bag holders poured in.

“Overall, we think Garcias will leave shareholders with nothing,” Hindenburg’s report concluded. “Either of Carvana’s two incredible stock runs, it could have raised significant capital and de-risked its balance sheet. Instead, the company pushed creditors and engaged in accounting games while the CEO’s father dumped billions in stock.”