Carvana under fire: Research report claims turnaround is a "mirage"
Short seller Hindenburg Research accused Carvana of accounting manipulation and unstable loans. The company denies the allegations.
Hindenburg Research, a well-known short seller, has targeted Carvana with allegations that its recent financial recovery is built on shaky foundations. The firm accused Carvana of relying on unstable loans, questionable accounting practices, and undisclosed related-party transactions involving CEO Ernie Garcia III and his father, Ernest Garcia II, who is also the company’s largest shareholder.
The report highlighted $800 million in alleged loan sales to an undisclosed related party and accused the company of masking higher delinquencies through borrower extensions. It also points to past controversies involving the Garcias, including lawsuits accusing them of running “pump-and-dump” schemes.
Carvana quickly dismissed the claims, calling them “intentionally misleading and inaccurate.” In a statement, the company noted that similar accusations have been made previously by other short sellers.
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Analysts and investors react
Despite the severity of Hindenburg’s accusations, analysts remain divided. JP Morgan’s Rajat Gupta acknowledged the need for more transparency but noted that Carvana’s earnings per unit sold do not appear inflated. Similarly, BTIG’s Marvin Fong described the claims as rehashed concerns that have already been absorbed by investors.
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Carvana’s shares took a nose dive following the release of Hindenburg’s report, with the stock down roughly 11% to $177 a share at market close on Friday—the lowest the company’s stock has been since early October.
On Monday, the stock rebounded nearly 7% after Carvana announced a renewed agreement with Ally Financial to sell up to $4 billion in used-vehicle loans, countering Hindenburg’s claim that Ally was pulling back from its relationship with Carvana.
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Carvana’s road to recovery
Since its IPO in 2017, Carvana’s journey has been turbulent. After reaching a stock price peak of $370 in 2021, the company faced plummeting used-vehicle prices and mounting debt, leading to a $2.9 billion loss in 2022.
Worries that the company could be insolvent by the end of 2022 sent its share price to an all-time low of just $3.72. However, restructuring efforts in 2023 turned the tide, bringing profitability and renewed investor optimism.
Even as the company navigates these allegations, analysts and investors appear cautiously optimistic about its future. Only two out of 24 analysts currently recommend selling Carvana stock.
This isn’t the first time that Hindenburg Research has sent an automotive company’s stock plummeting. In September 2020, Hindenburg released a damning research report accusing the founder of electric truck maker Nikola of making false statements to form partnerships with large automakers.
Final thoughts
While Hindenburg’s claims cast a shadow over Carvana’s turnaround, they also underscore broader concerns about transparency and governance in the online used-car sector. For Carvana, the challenge will be maintaining investor confidence while addressing these allegations and proving its recent success is more than just a mirage.
