Carvana Prepares Books, Hindenburg Research Claims

Carvana can be a house of cards. That’s according to Hindenburg Research, an investment research and activist short-selling firm (it’s never a good sign to incur the wrath of a company named after a famous disaster). published a report on Thursday it accuses the online used-car seller of “accounting manipulation” stemming from flaky loans it used to temporarily prop up its prospects while the father-son ownership team cashed out.

Report informs.Carvana: Father-Son Accounting for the Ages” claims that Carvana’s miraculous turnaround over the past two years has seen the company’s stock soar About 10 times in 2023 and climbed another 300% then in 2024 Looking at bankruptcy in 2022It is nothing but a “miracle”. Hindenburg Research claims that the father of Carvana’s CEO pulled more than $1.4 billion in shares as the stock price soared.

There appears to be some self-dealing at the heart of the alleged scheme, but to understand the alleged shadyness, it’s important to first understand how the business model works.

When people buy a car from Carvana, the credit comes from the retailer, but then sells those credits to other companies. His primary buyer for those auto loans was Ally Financial, but the bank has since withdrawn its partnership. This may be in part because Carvana’s underwriting practices on these loans have historically been questionable. Hindenburg notes that Wells Fargo is one company that has mastered the art cheater finance deals— terminated a partnership with Carvana in 2019 because “Their underwriting practices were not something we were particularly comfortable with.”

What exactly happens in Carvana’s underwriting process? According to the report, rubber stamp. A former Carvana director told Hindenberg: “We approved virtually 100% of the applicants we didn’t turn down for eligibility reasons.” About half of all Carvana’s loans are subprime loans according to Hindenburg, and 80% of them are the riskiest rating available. Even the company’s so-called “prime” borrowers have a 60-day delinquency rate four times higher than the industry average.

All this to say, Carvana car loans are a big risk. While Ally and the others turned away, the company found a new buyer for them. According to Hindenburg’s investigation, Carvana sold $800 million in auto loans to what the company called an “unaffiliated third party.” The thing is, Hindenburg doesn’t think this buyer is “out of touch.” The firm believes Carvana is selling its loans to an affiliate of DriveTime, a private car dealership owned by Ernest Garcia II, the father of Carvana CEO Ernie Garcia III and the car dealership’s largest shareholder.

Hindenburg believes that this loan servicer extends credit to its borrowers to make it appear that the company is in good shape when most of its loans are considered delinquent and risky.

So, according to Hindenburg’s research, Carvana appears to have made an incredible turnaround simply by approving every loan request that came across its desk. These juicy sales and investors rallied behind the company, sending its stock price to new heights. Meanwhile, Ernest Garcia II began selling his shares, pocketing a billion as bag holders poured in.

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