Hindenburg Research Latest In A Long Line Of Short Sellers Critical On Carvana

Shares of Carvana are on watch after short seller Hindenburg Research joins what can only be described as a long line of critics who have pointed out irregularities with the company’s accounting.

Calling the company a “father-son accounting grift for the ages”, the firm led by Nate Anderson says after “extensive document review and 49 interviews with industry experts, former Carvana employees, competitors and related parties of the company” they’re convinced the company’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,” the firm wrote. 

“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 junk-rated debt. Carvana’s business already faces major headwinds. Used vehicle prices have declined 20.3% in the past 2 years, according to the Manheim Price Index. Subprime auto loan delinquencies are now higher than during the Global Financial Crisis, per Fitch,” the firm concluded.

The firm raised questions about Carvana’s partners, stating: “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.”

“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’”.

Hindenburg writes that: “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.”

Anderson’s firm now raises questions about who is buying Carvana’s loans, stating: “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.”

Hindenburg continues: “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.”

The report continues: “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.”

Anderson’s Hindenburg is best known for its scathing criticism of one of Asia’s richest men, Gautam Adani, who the short seller accused of running the “largest corporate con in history”. Since then, Adani, along with multiple associates, has been indicted in the U.S. on unrelated charges of bribery.