Calvana may be a tower on the sand. This is according to investment research and activist short-selling firm Hindenburg Research (it’s never a good sign when a company named after a famous disaster becomes the target of ire), which announced Thursday that the company is selling online used car sales. It released a report accusing the company of “accounting fraud.” The “manipulation” stems from a shaky loan that the father-son ownership team is using to temporarily prop up its prospects while it cashes out.
The report, titled “Carvana: A Father-Son Accounting For The Ages,” notes that Carvana’s miraculous turnaround over the past two years has seen its stock price rise nearly 10 times in 2023. It claims to have increased by another 300% in 2024. 2022 is truly a mirage. Hindenburg Research claims Carvana CEO’s father liquidated more than $1.4 billion in stock as the stock soared.
There appears to be some self-dealing at the heart of the alleged scheme, but to understand the alleged plot, it is important to first understand how the business model works.
When people buy a car from Carvana, they get a loan from the retailer, which is then sold to another company. The primary buyer of these auto loans was Ally Financial, but the bank has since withdrawn its partnership. This is due in part to Carvana’s historically questionable underwriting practices on these loans. Hindenburg points to why Wells Fargo, a company that has mastered the art of fraudulent financial transactions, ended its partnership with Carvana in 2019. The reason for this was that “their underwriting practices were not particularly satisfactory to us.”
What exactly is going on in Carvana’s underwriting process? The report says it’s basically a rubber stamp. “We actually approved 100% of the applicants that we didn’t reject for compliance reasons,” a former Carvana director told Hindenberg. About half of Carvana’s total loans are subprime, and 80% of them are “deep subprime,” the riskiest rating available, Hindenburg said. Even among the company’s so-called “prime” borrowers, the 60-day delinquency rate is four times the industry average.
That being said, Carvana car loans are a big risk. But even as Ally and others pulled out, the company found new buyers for them. According to Hindenburg’s investigation, Carvana sold $800 million in auto loans to what it called “unrelated third parties.” But the problem is that Hindenburg doesn’t consider this buyer to be “unrelated.” The company believes Carvana is selling the loans to DriveTime affiliates. DriveTime is 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 the debt servicer is granting loan extensions to borrowers to make many of its loans, which would otherwise be considered delinquent and at risk, appear to be in good standing. are.
So, according to Mr. Hindenburg’s research, Carvana may have been able to achieve its extraordinary turnaround simply by approving nearly every loan request that came to its desk. This led to sales growth, investors supporting the company, and the stock price reaching new highs. Meanwhile, Ernesto Garcia II began selling his holdings, netting more than $1 billion as bag owners rushed in.
“Overall, we believe the Garcias will leave nothing for shareholders,” Hindenburg’s report concluded. “At any point in Carvana’s two extraordinary stock transactions, it could have raised significant capital and de-risked its balance sheet. Instead, the company pushed its creditors aside and made an accounting There was a lot of bargaining, during which the CEO’s father dumped billions of dollars in stock.
