Carvana's First Upgrade Since Hindenburg Report: A Buying Opportunity or a Red Flag?

Carvana (CVNA), the online used-car retailer that faced a short-selling research report last week, has received its first broker upgrade since then. Brad Erickson, an analyst at RBC Capital Markets, lifted Carvana's rating to 'outperform' from 'ector perform,' suggesting that the controversy sparked by Hindenburg Research's report has created a buying opportunity for investors. However, the upgrade comes amidst lingering concerns about the company's accounting practices, loan underwriting, and insider stock sales.

Carvana's stock spiked 284% in 2024, with investors believing that the company's worst days were behind it. However, Hindenburg Research's report, released on January 2, 2025, alleges that Carvana's turnaround is a "mirage" built on accounting manipulation and lax loan underwriting. The report claims that Carvana has sold $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.



Despite these concerns, RBC Capital Markets' upgrade indicates a positive outlook on Carvana's prospects. The upgrade may boost investor sentiment and potentially drive up Carvana's stock price. However, investors should be cautious and consider the potential risks associated with Carvana's valuation, net debt, and junk-rated status. The company's reliance on loan sales to third parties, particularly in the risky subprime and deep subprime space, further exacerbates these concerns.

To address the allegations raised by Hindenburg Research, Carvana should take steps to improve transparency, strengthen corporate governance, and enhance loan underwriting standards. By doing so, the company can work to rebuild investor trust in its long-term prospects and mitigate the risks associated with its business model.

In conclusion, Carvana's first upgrade since the Hindenburg Research report may present a buying opportunity for investors. However, the lingering concerns about the company's accounting practices, loan underwriting, and insider stock sales should not be overlooked. Investors should carefully consider the potential risks associated with Carvana's valuation, net debt, and junk-rated status before making a decision. By taking steps to address the concerns raised by Hindenburg Research, Carvana can work to rebuild investor trust and secure its long-term prospects.