Carvana might be a house of cards. That's according to investment research and activist short-selling firm Hindenburg Research (never a good sign to become the subject of all the rage from a company named after a famous disaster), which The report was released on Thursday. who accused online used car sellers of “Account manipulation” stemmed from shady loans used to temporarily boost business opportunities while the father-son ownership team withdrew money.
Report onCarvana: Father and son's accounting journey for the ages” claims Carvana's amazing turnaround over the past two years that has seen the company's stock Nearly 10 times in 2023 and climb up another 300% In 2024 after that Delay bankruptcy in 2022Nothing but an 'Illusion' Hindenburg Research claims that as the stock price skyrocketed, Carvana's CEO's father withdrew more than $1.4 billion from the stock.
Central to the alleged scheme appears to be self-management. But to understand the alleged ambiguity It is important to first understand how the business model works.
When people buy a car from Carvana, the loan comes from the retailer. Instead, it sells those loans to other companies. The primary buyer for those auto loans was Ally Financial, but the bank has since withdrawn its partnership.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 have been questionable in the past. Hindenburg noted that Wells Fargo, a company that specializes in art, defraud finance Offer—Terminated partnership with Carvana in 2019 because “their underwriting practices were not something we were particularly comfortable with.”
What happens in Carvana's warranty process? It's basically a rubber stamp, according to the report. A former Carvana director told Hindenberg, “We actually approve 100% of applicants that we don't reject for compliance reasons.” About half of Carvana's total loans are subprime loans, per Hindenburg, and 80%. of that loan is “Deep subprime,” which is the riskiest tier available. Even the company's so-called “prime” borrowers have default rates within 60 days that are four times higher than the industry average.
All of the above Carvana auto loans carry significant risk. But the company has already found a new buyer for them. Even as Ally and others turned away, according to Hindenburg research, Carvana sold $800 million worth of auto loans to what the company called However, the point is that Hindenburg does not consider this buyer. 'Unrelated' The company believes Carvana is selling the loans to affiliates of DriveTime, a private car dealership owned by Ernest Garcia II, the father of Carvana CEO Ernie Garcia III and a majority shareholder. The best in this car seller
Hindenburg believes this lender is extending loans to its borrowers. This is to make it appear that many of the company's loans are in good standing. Otherwise it will be considered as repayment and risk.
So from Hindenburg's digging, it looks like Carvana might be able to create an incredible turnaround by simply approving every loan application it comes across on the table. This surge in sales and investors backs the company. Push the stock price to new heights. Meanwhile, Ernest Garcia II began selling off his shares. With more than a billion in the bag as bag holders pour in.
“Overall, we think the Garcias will leave shareholders with nothing to lose,” Hindenburg's report concludes. balance sheet Instead, the company pushed creditors away and engaged in accounting games. Meanwhile, the CEO's father dumped billions in shares.”