Hindenburg Research Takes Short Position on Carvana: Here's Why
Thursday, Jan 2, 2025 11:14 am ET

Hindenburg Research, a prominent short-seller, has taken a short position on Carvana (CVNA), the online used car retailer, citing concerns about the company's financial stability, business model, and potential regulatory issues. In a recent report, Hindenburg Research outlined several red flags that have led them to believe that Carvana's stock price is significantly overvalued and that the company may face solvency risks in the near future. Here's a breakdown of the key points from the report and why investors should take note.
1. Financial Stability Concerns: Carvana has a high level of net debt (~$4.8 billion) and is junk-rated by ratings agencies. The company's reliance on loan sales to third parties, particularly subprime and deep subprime borrowers, has raised concerns about its ability to maintain solvency in the face of economic downturns. With subprime auto loan delinquencies at record highs, Carvana's financial health is at risk.
2. Business Model Risks: Carvana's business model relies heavily on loan sales to Ally Financial, which accounted for 60% of its total loan originations in 2023. However, Ally has scaled back its purchases in 2024, and there are concerns about the sustainability of this relationship. Additionally, Carvana's "originate to sell" model is heavily skewed towards packaging non-prime and subprime borrower loans, which increases the risk of loan defaults and reduced revenue from loan sales.
3. Potential Regulatory Issues: Carvana's suspected related-party loan sales to Cerberus Capital, a trust affiliated with Carvana Director Dan Quayle, raise concerns about transparency and regulatory compliance. These transactions, totaling $800 million in the past two quarters, have not been disclosed as related-party transactions, which is a violation of accounting standards and securities laws. This lack of disclosure could attract regulatory scrutiny and potentially impact Carvana's reputation and investor trust.
4. Overvaluation: Carvana's stock price is significantly overvalued compared to its peers and historical averages. The company trades at an 845% higher sales multiple relative to online car peers CarMax and AutoNation, and a 754% premium on a forward earnings basis. This overvaluation, combined with the company's financial stability concerns and business model risks, suggests that Carvana's stock price may be due for a correction.
In conclusion, Hindenburg Research's short position on Carvana highlights several significant concerns about the company's financial stability, business model, and potential regulatory issues. Investors should take note of these red flags and consider the risks associated with Carvana's stock price. As the company faces major headwinds and solvency risks, it is crucial for investors to stay informed and make decisions based on a thorough understanding of the company's financial health and business model.