Carvana: A Father-Son Accounting Grift For The Ages – Hindenburg

Hindenburg Research has taken a short position in shares of Carvana Co. (NYSE:CVNA)

• Carvana is a $44 billion online car dealer founded in 2012. Its main business is an online platform that allows retail customers to buy and sell used cars.
• Despite facing bankruptcy risks in 2022 and 2023, Carvana’s stock spiked 284% in 2024, with investors believing the company’s worst days are behind it.
• However, our research, including extensive document review and 49 interviews with industry experts, former Carvana employees, competitors and related parties of the company, undertaken over the course of 4 months, shows Carvana’s turnaround is a mirage.
• Our research uncovered $800 million in loan sales to a suspected undisclosed related party, along with details on how accounting manipulation and lax underwriting have fueled temporary reported income growth – all while insiders cash out billions in stock.
• Even before considering the findings of our investigation, Carvana is exorbitantly valued, trading at an 845% higher sales multiple relative to online car peers CarMax and AutoNation, and a 754% premium on a forward earnings basis. The company has ~$4.8 billion in net debt and is junk-rated by ratings agencies.
• Carvana’s business already faces major headwinds. Used vehicle prices have declined 20.3% in the past 3 years, according to the Manheim Price Index. Subprime auto loan delinquencies are now higher than during the Global Financial Crisis, per Fitch.
• Previously, Carvana CEO Ernie Garcia III’s father, Ernest Garcia II, sold $3.6 billion in stock between August 2020 and August 2021. In the year after he stopped selling, Carvana’s stock plunged 99% and faced bankruptcy concerns shortly thereafter.
• Since 2023 we see the same trend: Carvana has touted a bright future and posted three consecutive quarters of modest positive net income, an aggregate of $245 million, despite stress in the used auto market.
• For every $1 in net income it reported, the company has added $139 in market cap – a $34 billion market cap increase. With Carvana shares up ~42x, father Ernest Garcia II has sold another $1.4 billion in Carvana stock.
• As insiders unload stock, the company’s solvency risks remain. Almost 26% of Carvana’s gross profit consisted of sales of customer auto loans to third parties, largely in the risky subprime and deep subprime space. Gain on loan sales represented 2.2x Carvana’s net income in the past 9 months.
• Carvana has relied on a purchase commitment agreement with Ally Financial, to which it sold $3.6 billion of vehicle loans in 2023, ~60% of its total originations.
• Carvana has told investors for at least 6 years that it is seeking to diversify outside of its relationship with Ally, but thus far has not announced new financing partners.
• After calling off an earlier agreement in principle with Carvana around 2019, a Wells Fargo senior manager told us: “As we dug into it, the more we learned, the less we liked about it.” They cited specific concerns about lax underwriting and related-party loan servicing.
• As subprime auto has declined, Ally has amended its arrangement with Carvana 5 times in the last two years. Each time, Carvana redacts crucial information that would help investors understand the terms of the relationship.
• Over the last 2 years, Ally’s loan book has become increasingly concentrated, with Carvana loans rising from 5% of its consumer auto portfolio to 8.4%. In September 2024, Ally’s stock fell 20% after warning investors that “on the retail auto side, our credit challenges have intensified”.
• Sales to Ally have scaled back year to date through September 2024. Carvana sold $2.15 billion of loans to Ally in the period (~$2.86 billion on an annualized basis), only 35% of total originations. This compares to $3.6 billion in loans or 60% of total originations in 2023.
• One Ally executive told us: “We’ve pulled back from them [Carvana] pretty significantly in 2024. Ally’s Carvana purchase commitment extends to January 2025, posing a near-term risk to Carvana’s business model should it renegotiate on less-favorable terms.
• With Ally pulling back, a new, unnamed buyer has quietly emerged exactly when Carvana needed it. In the past two quarters, Carvana sold $800 million in loans to an “unrelated third party.” The mystery buyer made up 18.3% and 16.3% of total loan sales in Q2 and Q3 2024.
• Lien filings reveal the buyer is likely a trust affiliated with Cerberus Capital, where Carvana Director Dan Quayle is Chairman of Global Investments, indicating the new buyer is an undisclosed related-party, contrary to the company’s claims.
• These suspected financing games are occurring as Carvana faces major economic headwinds— 44% of loans for cars purchased since 2022 are underwater, per a recent survey from CarEdge.
• Carvana’s “originate to sell” model is highly skewed to packaging non-prime and subprime borrower loans. Per a former Carvana director: “I don’t think the model is much different than what we saw with kind of the early 2000 mortgage-backed securities”.
• Almost 44% of Carvana’s loans it sells in ABS deals are non-prime. Over 80% of its recent non-prime ABS deals have weighted average FICO scores in the “deep subprime” range, the riskiest levels, per Morningstar data.
• Carvana’s toxic loan book is a result of lax underwriting standards: “We actually approved 100% of the applicants”— interview with a former Carvana director describing virtually non-existent underwriting standards.
• Carvana has issued over $15.4 billion of asset-backed securities (ABS), which it retains partial interest in on its balance sheet. 60-day delinquencies across its supposedly “prime” borrowers are over 4x industry averages.
• A former Ally executive told us: “Those numbers… my heart might have skipped a few beats…. Those loss numbers are high. The delinquencies across 30/60 buckets are high.”
• Carvana’s subprime loans had the highest increase in borrower “extensions” of any subprime auto issuer, a major sign of stress, per S&P data. Carvana’s extensions more than doubled this year, while most peers saw declines.
• With its market collapsing, Carvana has propped up its numbers through a grab bag of related-party accounting games.
• For example, Carvana’s increase in borrower extensions is enabled by its loan servicer, an affiliate of private car dealership DriveTime, run by Carvana’s CEO’s father. The company seems to be avoiding reporting higher delinquencies by granting loan extensions instead.
• In another example, in 2023, $145 million of “other revenue” or ~8.4% of gross profit came from related parties. This included $138 million of commissions and profit-share from DriveTime.
• Carvana appears to be dumping unreported costs of extended warranties onto related-party DriveTime, resulting in artificially inflated revenue and profitability. We estimate Carvana reports ~58% more warranty income per sale due to the relationship.
• A former Carvana leader told us that warranty reimbursements from related-party DriveTime were “pretty generous… back to Carvana” as a way of showing better revenue to public investors.
• A former director told us: “As a related-party, we’re [Carvana] able to kind of have an agreement that is favorable to pull as much of that profit forward.”
• Additionally, instead of marking down inventory, Carvana can offload cars to related-party DriveTime at a premium. Over the last three fiscal years, Carvana has generated $105 million revenue from selling cars wholesale to DriveTime.
• A former Carvana director responsible for wholesale inventory told us: “[Selling cars to DriveTime is] a lever that’s not talked about. It’s kind of like Fight Club… there’s certain things we don’t talk about, and we don’t talk about DriveTime.”
• Carvana engaged in “sham” deals with DriveTime, along with numerous other improprieties, per allegations in a 2024, 332-page amended class action lawsuit brought by two pension funds, which included information from 12 confidential witnesses.
• These sketchy related-party dealings seem to be enabled by conflicted board members. Carvana’s “independent” audit committee has two individuals that served on the board of related-party DriveTime.
• One “independent” member of the audit committee, Greg Sullivan, was previously suspended by the New York Stock Exchange after he sent money to Carvana’s CEO’s father in contravention of a prohibition order, per legal records.
• Carvana’s CEO’s father, the key shareholder dumping billions in stock, previously pled guilty to felony bank fraud over allegations that he helped a company report fake accounting income through sham transactions. SEC charges also alleged he “signed a falsified letter for [the company’s] auditors”.
• In addition to the grab bag of related-party tricks, Carvana exhibits a litany of other accounting issues.
• Carvana’s CEO has said: “We don’t end up taking the credit risk over an extended period of time.” Yet Carvana’s loans held on its books have increased 50% since 2021, to $553 million in Q3 2024. Carvana uses an accounting treatment that records no loss reserves on these loans at booking.
• A former executive confirmed that Carvana could “move very large amounts of income around quarter to quarter” by holding loan sales over the quarterly line.
• For example, on May 4th, Carvana reported Q1 2023 earnings, showing a 41% y/y decline in loan sales, swinging to negative adjusted EBITDA amidst bankruptcy concerns. CEO Ernie Garcia blamed the delayed loan sales on “uncertainties” in the securitization market.
• Against this backdrop, with the stock price depressed, the Garcias signed an agreement to purchase $126 million in Carvana stock on July 17^th, 2023.
• Two days later, Carvana announced the “best quarter in company history,” featuring a massive earnings beat from re-accelerated loan sales, as well as the successful restructuring of its debt. The Garcias are up ~$427 million on those precisely-timed purchases.
• In Q3 2024, Carvana reported $3,497 in retail gross profit per unit, a key metric for investors to understand the profitability from the sale of retail units.
• Carvana inflates this key metric by ~34.5% by dumping an estimated $390 million of selling costs into SG&A annually, in stark contrast to accounting practices at competitors.
• In August, 2023, Carvana told investors its cost reduction measures did not impact quality. But a former reconditioning leader told us otherwise: “They did make an adjustment to the standards, but only for that segment. They call it their economy line. I don’t think they talk about that.”
• Overseeing all this for 10+ years is Carvana’s mid-tier auditor, Grant Thornton, which also has/had a relationship with related-party DriveTime. “We are not doing what the market thinks. We are not looking for fraud… we are not set up to look for fraud” – Former Grant Thornton UK CEO.
• Finally, Carvana is subject to an undisclosed SEC investigation, per Disclosure Insight, a Freedom of Information Act (FOIA) intelligence firm. We think the company should clarify to the market whether it has faced SEC investigations and their status.
• Overall, we think the Garcias will leave shareholders with nothing. At any point in Carvana’s two incredible stock runs, it could have raised significant capital and de-risked its balance sheet.
• Instead, the company has pushed off creditors and engaged in accounting games while the CEO’s father dumps billions in stock. We think Carvana is truly an accounting grift for the ages— we see rough times ahead for both stockholders and bondholders.

Initial Disclosure: After extensive research, we have taken a short position in shares of Carvana Co. (NYSE:CVNA). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.

Background: $44 Billion Online Used Car Dealer

Carvana (NYSE:CVNA) is a $44 billion online car dealer headquartered in Tempe, Arizona. The company was founded in 2012 and is led by co-founder, Chairman and CEO, Ernest Garcia III.

Carvana’s main business is an online platform that allows retail customers to buy and sell used cars, which accounts for ~70% of its total revenue, per the company’s latest quarterly report. [Pg. 2]

The company offers financing, insurance and other services like car protection plans.

(Source: Carvana website)

The company also runs a wholesale auction business, called ADESA, which it acquired in May 2022. [Pg. 7] ADESA has 56 locations where registered auto dealers can participate in auctions, either virtually or on-site. Carvana also acquires vehicles in these auctions.

Carvana originally spun out of a company called DriveTime – a used car-dealership chain run by Ernest Garcia II, a key Carvana shareholder and a felon convicted of bank fraud in 1990. Garcia pled guilty to charges alleging he helped a company report fake accounting income through sham transactions. SEC charges also alleged he “signed a falsified letter for [the company’s] auditors” as part of the scheme. His son, Ernest Garcia III has been the CEO of Carvana since its inception.

Carvana went public on the NYSE via a direct listing in April 28, 2017. It currently has a market capitalization of ~$44 billion.

Bull Case: A Disruptive Online Car Dealer Covering Nearly All Of The U.S., With Industry-Leading Unit Economics

The U.S. used car industry is projected to reach $600 billion in 2024, but remains fragmented, with many traditional dealerships serving a small sub-market.

Carvana now operates at scale, having expanded its presence to cover 81.1% of the U.S. population, per its Q3 2024 investor presentation. [Slide 13] Carvana had over 45,000 vehicles available for sale on its website as of September 30, 2024. [Slide 8]

(Source: Carvana Q3 2024 Investor Presentation [Slide 8])

Carvana prides itself on a “simple, seamless and differentiated used car buying experience”, where customers can purchase cars online rather than in dealership showrooms. The company’s platform has been described as “the Amazon of cars” by Forbes.

In September 2023, amid fears of bankruptcy, the company “aggressively restructured”, working with creditors to slash $1.3 billion of debt. Since then, the company has focused on a “three-step plan” that includes (1) driving the business to positive EBITDA, (2) achieving positive unit economics and (3) returning to profitable growth. [Pg. 2]

Pursuant to this “three-step plan”, Carvana has significantly improved its reported unit economics. Its retail vehicle gross profit per unit (“GPU”) has increased from $1,131 in September 2022 to $3,497 in September 2024, representing a 209% increase. This GPU is 54% higher than competitor CarMax’s equivalent metric in Q2 at $2,269.[1]

With Carvana’s share price rocketing up over 284% in 2024, investors believe the company’s worst days are behind it.

Read the full report here by Hindenburg Research