Hindenburg Short Report Slams Carvana Over Alleged 'Grift'

Key Points

• "Forensic financial research" firm and well-known short-seller Hindenburg Research released on January 2, 2025, a report alleging that online car dealer Carvana is a "gift for the ages."
• The report claims that Carvana has used loan sales to an undisclosed related party and used accounting manipulation to show growth in recent quarters, fueling a significant rally.
• Hindenburg announced that it had taken a short position in Carvana at the time of the release of the report.

Polarizing activist short-seller Hindenburg Research—known for its bombshell reports alleging corporate fraud and other malfeasance by companies including Nikola Corp. NASDAQ: NKLA and India's Adani Group—published on January 2, 2025, an article about its latest target: Carvana Co. NYSE: CVNA.

In the report, Hindenburg alleges that the $44-billion online car dealer's stock spike of 284% throughout 2024, which some investors have hailed as a major turnaround following bankruptcy scares in 2022 and 2023, is a "mirage." At the core of Hindenburg's report is an allegation that Carvana engaged in accounting manipulation and lax loan underwriting to give the appearance of income growth in recent quarters. As is its custom, Hindenburg also announced at the time of the report's release that it had entered a short position of undisclosed size in CVNA shares.

Allegations of Suspicious Loan Sales and Inflated Top- and Bottom-Line Performance

Hindenburg claims to have identified $800 million in loan sales to a "suspected undisclosed related party" as Carvana's prior purchase commitment agreement with Ally Financial has changed in ways not entirely clear to outsiders in recent years. Carvana sold $3.6 billion of vehicle loans to Ally in 2023, representing about 60% of its total originations. However, sales to Ally dwindled throughout the first three quarters of 2024 to roughly 35% of Carvana's originations, or $2.2 billion, for that period.

Hindenburg's report suggests that the unnamed buyer of an additional $800 million in loans in the first quarters of 2024 is likely a trust affiliated with Cerberus Capital—that company's Chairman of Global Investments, Dan Quayle, is a Carvana Director.

Further, Hindenburg claims that Carvana's model focuses on non-prime and subprime loans and that its "toxic loan book is a result of lax underwriting standards," resulting in more than $15.4 billion in asset-backed securities that the car dealer has issued. The report also suggests that 60-day delinquencies across Carvana's borrowers are more than four times the industry average.

The report alleges Carvana has used accounting "games" to give the appearance of stronger revenue and profit performance. These include the use of borrower extensions to avoid loan delinquencies and a range of manipulations using DriveTime (a dealership run by the father of Carvana's CEO), including profit-share agreements between the two companies and Carvana's history of offloading costs of extended warranties and even excess inventory to DriveTime. The report also cites a former executive at Carvana who claimed that the company would manipulate income figures by holding loan sales over the quarterly line.

Meanwhile, Hindenburg alleges that Carvana's CEO and his father have timed the market with incredible precision, allowing them to earn billions in sales of Carvana shares.

Valuation and Debt Concerns

Hindenburg's report also indicates potential concerns investors may have about Carvana even without accounting for its alleged "grift." At the time of the report's release, Hindenburg said that Carvana traded at an 845% premium to its peers on a 1-year forward P/S basis and a 754% premium on a 1-year forward P/E basis. The firm had a net debt of $4.8 billion at the end of September 2024, with cash interest payments of $215 million per year due beginning February 2025 based on long-term debt obligations. Further, Carvana's credit rating of B- is the lowest of its peer companies as well.

Carvana: Overview, Business Model, Bankruptcy Fears

Founded in 2012, Carvana is an online car dealer that operates a platform through which individual customers can buy and sell used cars. Activity on this platform makes up the large majority (around 70%) of the company's business by revenue, with other operations including services like insurance, financing, and protection plans. Finally, Carvana operates a wholesale auction business called ADESA. Carvana had its IPO in 2017.

In a recent investor presentation, Carvana noted that its operations cover more than 81% of the U.S. population, with more than 45,000 vehicles available for sale as of September 30, 2024.

Still, the company has fairly recently experienced concerns about potential bankruptcy. In September 2023, for instance, it aimed to trim $1.3 billion in debt as part of a major restructuring effort. This, along with efforts to achieve positive EBITDA and to roughly triple its retail vehicle gross profit per unit from September 2022 to September 2024, likely helped to drive a significant rally in the last several months.

As of January 3, 2025, Carvana had not yet issued a press release addressing Hindenburg's report.