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Popular short seller Hindenburg Research revealed a bet against Carvana On Thursday, it claimed the online used car retailer's recent shift is a “mirage” fueled by bad loans and accounting manipulation.
The report, titled “Carvana: A Father-Son Accounting Trick for the Ages,” focuses on Carvana's practice of loan sales as well as the business relationship between CEO Ernie Garcia III and his father Ernest Garcia II, Carvana's largest shareholder.
Carvana shares closed Thursday at $199.56, down 1.9% — marking its first close below $200 a share since October. The stock is up nearly 400% in 2023, as the company improves results and cuts costs as part of a turnaround plan led by Ernie Garcia III.
In a statement, Carvana called the Hindenburg report “deliberately misleading and inaccurate” without going into specific details.
“In the seven years since our IPO, Carvana has been one of the most intensively researched public companies. The arguments in today's report are intentionally misleading and inaccurate and have already been made multiple times by other short sellers seeking to profit from a decline Our stock price “We plan to remain focused on executing on our plan for another great year in 2025,” Carvana said in an email statement Thursday afternoon.
Hindenburg says it disclosed $800 million in loan sales “to an undisclosed suspected related party, along with details about how accounting manipulation and lax underwriting fueled reported temporary income growth — all while insiders cashed billions in stock.”
Hindenburg also alleges that the increase in Carvana's borrower extensions is enabled by the company's loan servicer, a subsidiary of the private car dealership DriveTime, which Garcia II operates. “The company appears to be avoiding reporting high delinquencies by granting loan extensions instead,” Hindenburg said.
CNBC could not immediately verify the allegations in Hindenburg's report.
This is not the first time the Garcia family and its control of the company has been the target of some investors, including lawsuits in recent years alleging the Garcia family ran a “pump and dump” scheme to enrich themselves.
Carvana went public in 2017 after its spin-off from DriveTime.
DriveTime was once a bankrupt car rental company known as Ugly Duckling, and Garcia II, who pleaded guilty to bank fraud in 1990 in connection with Charles Keating's Lincoln Savings and Loan scandal, has evolved into a dealer network.
It is worth noting that Carvana still relies on the company to provide services and collections for financing automobile vehicles, and the two companies share the revenues generated from the loans. The companies also, on occasion, sell vehicles to each other, and Carvana leases many facilities from DriveTime in addition to revenue-sharing agreements.
