Carvana is cooking her books, Hindenburg’s research claims

Carvana may be a house of cards. That’s according to investment research and short-selling activist Hindenburg Research (never a good sign to be the subject of wrath at a company named after a famous disaster), which It published a report on Thursday Which accuses the online used car seller of “accounting fraud” stemming from the unsettled loans it uses to temporarily prop up its prospects while the father-and-son ownership team siphons off cash.

The report is entitled “Carvana: The gift of father-son accountability for the ages“He claims the miraculous turnaround Carvana has achieved over the past two years has seen the company’s shares Nearly 10x in 2023 And he went up Another 300% In 2024 after Staring at bankruptcy in 2022It is nothing but a “mirage”. Hindenburg Research claims that as the stock price skyrocketed, Carvana’s CEO father cashed out more than $1.4 billion worth of stock.

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

When people buy a car from Carvana, the retailer issues the loan, but then sells those loans to other companies. The primary buyer of those auto loans was Ally Financial, but the bank has since backed out of its partnership. This may be in part because Carvana’s underwriting practices on those loans have historically been suspect. Hindenburg notes that Wells Fargo — a company that has mastered the art of… cheater financial Transactions– Canceled the partnership with Carvana in 2019 because “their underwriting practices were not something we were particularly comfortable with.”

What exactly happens in the Carvana underwriting process? Basically, a rubber stamp, according to the report. “We actually approved 100% of applicants and did not reject for compliance reasons,” a former Carvana manager told Hindenberg. Nearly half of all Carvana loans are subprime loans, according to Hindenburg, and 80% of those are “deep subprime loans,” the riskiest classification available. Even the company’s “prime” borrowers have a 60-day delinquency rate four times higher than the industry average.

All of this means that Carvana car loans pose a significant risk. However, the company has found a new buyer for them even as Allie and others move away. According to Hindenburg’s research, Carvana sold $800 million in auto loans to what the company described as an “unrelated third party.” But the thing is, Hindenburg doesn’t think this buyer is “unrelated.” The company believes Carvana is selling its loans to a subsidiary of DriveTime, a private car dealership owned by Ernest Garcia II, father of Carvana CEO Ernie Garcia III and the car seller’s largest shareholder.

Hindenburg believes that this loan servicer grants loan extensions to borrowers in order to make it appear that more of the company’s loans are in good standing when they are deemed delinquent and burdensome.

So, judging by Hindenburg’s digs, it looks like Carvana may have pulled off a stunning turnaround by approving practically every loan application that comes across its desk. These sales and investors have rallied behind the company, pushing its stock price to new highs. Meanwhile, Ernest Garcia II began selling his shares, raising more than $1 billion with an influx of portfolio holders.

“Overall, we believe the Garcias will leave shareholders with nothing,” the Hindenburg report concludes. “At any point in one of Carvana’s two staggering periods of inventory depletion, it could have raised significant capital and eliminated risk on its balance sheet. Instead, the company alienated creditors and engaged in accounting games while the CEO’s father dumped billions in stock.