Carvana is cooking his books, Hindenburg Research Claims

Carvana can be a house of cards. It is according to the investment research and activist of the short selling company Hindenburg Research (never a good sign to be the subject of ire from a company named after a famous disaster), that published a report on Thursday that accuses the online used car seller of “accounting manipulation” stemming from unstable loans it uses to temporarily bolster its prospects while its father-son ownership team cashes in.

The report, entitled “Carvana: A Father-Son Accounting Grift For The Ages” states that the miracle of Carvana in the last two years, which has seen the stock of the company. almost 10x in 2023 and went up another 300% in 2024 later looking at bankruptcy in 2022it is nothing but a “mirage”. Hindenburg Research claims that as the stock price rose, Carvana’s CEO’s father cashed in more than $1.4 billion in stock.

At the center of the attached scheme seems to be a bit of self-dealing, but to understand the alleged shadow, it is important to first understand how the business model works.

When people buy a car from Carvana, a loan comes from the retailer, but then they sell those loans to other companies. Its primary buyer for those auto loans was Ally Financial, but the bank has since withdrawn its partnership.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 scam financial traits– canceled a partnership with Carvana in 2019 because “Their underwriting practices were not something we were particularly comfortable with.”

What exactly happens in the Carvana subscription process? Basically, a rubber stamp, according to the report. A former Carvana director told Hindenberg: “We actually approved 100% of the applicants we didn’t reject for compliance reasons.” About half of all Carvana loans are subprime, according to Hindenburg, and 80% of those are “deep subprime,” which is the riskiest classification available. Even the company’s so-called “prime” loans have a 60-day delinquency rate four times higher than the industry average.

All that said, Carvana car loans are a big risk. Still, the company found a new buyer for them even as Ally and others walked away. According to Hindenburg’s investigation, Carvana sold $800 million in auto loans to what the company called an “unrelated third party.” The thing is, though, Hindenburg doesn’t think this buyer is “unrelated.” The firm believes Carvana is selling its loans to a subsidiary of DriveTime, a privately held car dealership owned by Ernest Garcia II, the father of Carvana CEO Ernie Garcia III and the car retailer’s largest shareholder.

Hindenburg believes that this loan servicer grants loan extensions to its borrowers to make it appear that more of the company’s borrowers are in good standing, when they would otherwise be considered delinquent and burdened with risk.

So, according to Hindenburg’s dig, it appears that Carvana made his incredible breakthrough simply by approving virtually every loan request that came across his desk. This juice sale and investors rallied behind the company, pushing its share price to new highs. Meanwhile, Ernest Garcia II began selling his shares, pocketing more than a billion as the pockets spilled over.

“Overall, we think the Garcias will leave shareholders with nothing,” Hindenburg’s report concludes. “At any time of Carvana’s two incredible stocks, it could have raised significant capital and reduced the risk of its balance sheet. Instead, the company has kept creditors away and engaged in accounting games while the CEO’s father has spent billions in stock.