Carvana's Accounting Mirage and the Risks to Auto Lending and Retail Models

In the fast-evolving landscape of digital auto retail, Carvana Co. (NYSE: CVNA) has long been hailed as a disruptor. Yet beneath its glossy veneer of convenience and innovation lies a labyrinth of financial engineering, solvency risks, and conflicts of interest that threaten to unravel its business model. As the company's reliance on subprime lending and opaque accounting practices intensifies, investors and regulators are left grappling with a critical question: Is Carvana's success built on sustainable growth-or a house of cards?

The Mirage of Financial Engineering

Carvana's ascent has been fueled by its aggressive use of asset-backed securities (ABS) and off-balance-sheet entities to fund its operations. According to a Hindenburg Research report, over 44% of the loans Carvana packages into ABS are classified as nonprime (credit scores between 601–660), with more than 80% of recent nonprime deals falling into the "deep subprime" category. This high-risk loan portfolio is then securitized and sold to investors, allowing Carvana to maintain liquidity while shifting credit risk to third parties.

However, the complexity of these structures raises red flags. Carvana's ABS deals, such as the 2025-P3 issuance, involve hired rating agencies that may lack independence due to Carvana paying their fees, as Hindenburg Research notes. This creates a conflict of interest, as agencies might downplay risks to secure future business. Meanwhile, the company's off-balance-sheet entities-such as trusts affiliated with Cerberus Capital, where Carvana director Dan Quayle holds a leadership role-introduce further opacity, as Hindenburg Research observes. These arrangements obscure the true extent of Carvana's liabilities and dependencies, masking a solvency risk that could erupt in a downturn.

Solvency Risks in a Subprime-Dependent Model

Carvana's financial health is precarious. While the company reported positive free cash flow of $716 million in 2023, as Investing.com notes, its debt-to-capital ratio of 92.2%, as MarketBeat reports, remains among the highest in the industry. This leverage amplifies its vulnerability to macroeconomic shocks, such as rising interest rates or a credit market freeze.

The subprime lending sector has already shown signs of strain. Recent bankruptcies of peers like PrimaLend and Tricolor Holdings, as Sherwood News reports, underscore the fragility of this niche. Carvana's own data is equally troubling: 60-day delinquencies among its "prime" borrowers are four times the industry average, as Hindenburg Research notes. With subprime loan extensions doubling in the past year, as Hindenburg Research notes, the company is betting on a market that may not withstand a downturn.

Conflicts of Interest and Related-Party Accounting

The most alarming aspect of Carvana's operations is its web of related-party transactions. The company's CEO, Roger Wertheim, has a father who runs DriveTime, a private dealership that services Carvana's loans and receives $138 million in commissions annually, as Hindenburg Research notes. This arrangement not only skews transparency but also allows Carvana to offload costs-such as extended warranty expenses-onto DriveTime, artificially inflating profitability, as Hindenburg Research notes.

Further complicating matters is Carvana's reliance on an unnamed third-party buyer for auto loans, potentially linked to Cerberus Capital, as Hindenburg Research suggests. Meanwhile, Ally Financial's recent withdrawal from purchasing Carvana loans-selling only $2.15 billion in 2024 compared to $3.6 billion in 2023, as Hindenburg Research notes-highlights the fragility of the company's funding sources.

Implications for the Auto Lending Industry

Carvana's struggles reflect broader risks in the auto lending sector. Its aggressive underwriting standards-approving 100% of applicants, as Hindenburg Research notes-have set a dangerous precedent for risk tolerance. If defaults rise, the ripple effects could destabilize not just Carvana but the entire ABS market, which relies on the illusion of creditworthiness.

For investors, the lesson is clear: Carvana's business model is a high-stakes gamble. While its digital retail platform and profitability gains, as Investing.com notes, may seem attractive, the underlying risks-subprime exposure, opaque accounting, and conflicted governance-demand caution.

Conclusion

Carvana's "mirage" is a cautionary tale of financial engineering gone awry. By leveraging subprime lending, off-balance-sheet structures, and related-party accounting, the company has created a facade of stability that belies its true vulnerabilities. As the auto lending sector faces headwinds, Carvana's fate may hinge on whether it can rein in its risk-taking-or if its house of cards will collapse under the weight of its own contradictions.