Prominent short-seller Hindenburg Research has taken a short position against Carvana after accusing the online auto retailer of significant financial impropriety, alleging that the business model is unsustainable and its subprime loan portfolio poses major risks, according to a report by Bloomberg.
In a detailed report titled: “Carvana: A Father-Son Accounting Grift for the Ages”, Hindenburg accuses Carvana of lax underwriting standards, questionable financial practices, and reliance on a related-party company owned by Ernie Garcia II, the father of Carvana CEO Ernest Garcia III, to bolster results.
Carvana’s shares fell 1.9% after the report’s release, though they had surged 284% last year amid improving results and optimism about the company’s financial recovery.
In response, Carvana dismissed Hindenburg’s claims as “misleading and inaccurate,” stating they echo arguments made by other short-sellers. A company spokesperson said Carvana has been one of the most scrutinised public companies since its 2017 IPO and criticised the report as an attempt to profit from a stock price decline.
Hindenburg’s report centres on accusations of insider profiteering and risky loan practices, and claims the Garcia family has profited heavily from stock sales, with $3.6bn sold between 2020 and 2021 and an additional $1.4bn during last year’s stock rally.
A former Carvana director also alleged the company approved nearly 100% of loan applicants, raising concerns about the quality and risks of its subprime loan portfolio.
Hindenburg alleges Carvana manipulated results by selling vehicles at inflated prices to DriveTime, a car dealership owned by Ernie Garcia II. This practice, the report claims, helped Carvana avoid markdowns.
The report also states that Carvana had the highest increase in borrower extensions among subprime issuers, facilitated by a DriveTime affiliate that services some Carvana loans, and that Carvana allegedly benefits from generous reimbursements from DriveTime on extended warranty plans while absorbing significant costs, a tactic Hindenburg claims boosts the company’s financial performance.
