CVNA: Summary of the Hindenburg Report
AInvestFriday, Jan 3, 2025 12:11 pm ET
2min read
CVNA --

Hindenburg Research released a critical report accusing Carvana (CVNA) of engaging in extensive financial manipulation and insider dealings. The report alleged $800 million in loan sales to undisclosed related parties, accounting manipulation to inflate profits, and insider stock sales totaling billions. The report titled *"Carvana: A Father-Son Accounting Grift for the Ages"* suggested that Carvana’s financial recovery is a façade, relying on questionable practices rather than sustainable operations.

Market Reaction

Carvana shares dropped nearly 5% intraday before closing down 2% at $199.56. This marks a sharp reversal for a stock that soared over 300% in 2024 due to cost-cutting measures, debt restructuring, and a resurgence in used car demand. While the immediate market impact was somewhat contained, the report raised questions about Carvana’s ability to maintain investor confidence amidst ongoing scrutiny.

Insider Sales and Related-Party Allegations

Hindenburg highlighted insider sales by CEO Ernie Garcia III and his father, Ernest Garcia II, totaling $5 billion across two major stock rallies since 2020. The report also accused Carvana of selling loans and vehicles to related-party entities such as DriveTime at inflated prices to mask operational weaknesses. These transactions were described as "sham deals," effectively transferring costs while boosting Carvana's reported profitability.

Analyst Rebuttals

While some analysts acknowledged the concerns raised in the report, they also pointed to Carvana’s turnaround story. For instance, J.P. Morgan emphasized the importance of focusing on EBITDA per unit and free cash flow rather than gross profit per unit (GPU), which is more susceptible to accounting adjustments. They argued that while Carvana’s practices warrant greater transparency, the broader economic stabilization in the used car market could support its operations.

Loan Underwriting and Subprime Risks

Hindenburg’s report also criticized Carvana’s lax underwriting standards, with allegations that 100% of loan applicants were approved at one point. Nearly 44% of loans sold in recent asset-backed securities (ABS) deals were classified as "non-prime," with many borrowers having "deep subprime" credit scores. These loans have reportedly seen the highest rate of borrower extensions, a potential sign of stress as delinquencies rise across the auto loan sector.

Debt Reliance and Ally Financial Concerns

Carvana’s heavy reliance on Ally Financial for loan purchases was another focal point. The report noted that Ally has scaled back its loan purchases from Carvana, reducing its exposure from 60% of Carvana’s total originations in 2023 to 35% in 2024. This pullback poses a risk to Carvana’s business model, as its financing arrangements become increasingly concentrated with a single unnamed buyer, suspected to be affiliated with Cerberus Capital.

Industry Headwinds

The report also contextualized Carvana’s struggles within broader industry challenges. Used vehicle prices have declined over 20% in the past three years, while subprime auto loan delinquencies are at levels not seen since the Global Financial Crisis. These macroeconomic pressures exacerbate Carvana’s reliance on financial engineering to sustain its growth narrative.

Corporate Governance and Transparency Issues

Hindenburg’s allegations extend to Carvana’s corporate governance, citing conflicts of interest among board members and a history of opaque financial practices. These include claims of shifting costs into SG&A to inflate GPU and failing to disclose SEC investigations. Critics argue that these practices undermine investor trust and could lead to regulatory scrutiny.

Outlook and Investor Considerations

The Hindenburg report has cast a shadow over Carvana’s impressive 2024 stock performance, raising serious questions about its financial sustainability and governance practices. While analysts remain divided—some urging a focus on EBITDA and macro trends—investors will likely demand greater transparency. The combination of industry headwinds, solvency risks, and reputational damage makes Carvana’s outlook highly uncertain. Further revelations or regulatory actions could significantly impact the stock’s trajectory.

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