Hindenburg Shorts Carvana, Calls Turnaround a ‘Mirage’

Carvana’s Turnaround Under Fire as Short Seller Hindenburg Research Uncovers Allegations of Accounting Manipulation and Unstable Loans

Noted short seller Hindenburg Research has disclosed a bet against Carvana, an online used-car retailer, claiming that the company’s recent turnaround is a "mirage" propped up by unstable loans and accounting manipulation.

The report, titled "Carvana: A Father-Son Accounting Grift For The Ages," centers on Carvana’s practice of loan sales and the business relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, who is Carvana’s largest shareholder.

Carvana’s Response

Carvana has dismissed the report as "intentionally misleading and inaccurate" without providing specific details. The company stated that it will focus on executing its plan for another great year in 2025.

Allegations of Accounting Manipulation and Unstable Loans

Hindenburg claims to have uncovered $800 million in loan sales to a suspected undisclosed related party, as well as details on how accounting manipulation and lax underwriting have fueled temporary reported income growth – all while insiders cash out billions in stock.

The report also alleges that an increase in borrower extensions at Carvana is being enabled by the company’s loan servicer, an affiliate of private car dealership DriveTime, which is run by Garcia II. The company seems to be avoiding reporting higher delinquencies by granting loan extensions instead, according to Hindenburg.

Garcia Family Control and Controversies

This is not the first time the Garcia family and its control of the company have been a target of some investors, including lawsuits in recent years alleging the Garcias run a "pump-and-dump" scheme to enrich themselves.

Carvana’s History and Relationship with DriveTime

Carvana went public in 2017 after spinning off from DriveTime. DriveTime was formerly a bankrupt rental-car business known as Ugly Duckling that Garcia II grew into a dealership network. Carvana still relies on DriveTime for servicing and collections on automotive vehicle financing, and the two companies share revenues generated by the loans.

Conclusion

The allegations made by Hindenburg Research have sent Carvana’s stock price tumbling, with shares closing Thursday at $199.56, down 1.9%. The company’s recent turnaround, which has seen its stock increase nearly 400% in 2023, is now under scrutiny.

FAQs

Q: What is the nature of the allegations made by Hindenburg Research?
A: Hindenburg Research has accused Carvana of accounting manipulation and unstable loans, claiming that the company’s turnaround is a "mirage" propped up by these practices.

Q: How has Carvana responded to the allegations?
A: Carvana has dismissed the report as "intentionally misleading and inaccurate" without providing specific details.

Q: What is the significance of the Garcia family’s control over the company?
A: The Garcia family, specifically Ernie Garcia III and his father Ernest Garcia II, have been the subject of controversy and lawsuits, with some investors alleging that they run a "pump-and-dump" scheme to enrich themselves.