Mirage
Carvana shares sank after shortseller Hindenburg Research called its turnaround a mirage. Is it time to hit the brakes on this auto stock?
Carvana Co. ($CVNA) was one of the best performing stocks in 2024. Its impressive comeback after nearing bankruptcy made it a case study for operational efficiency as its stock price soared past peers AutoNation ($AN) and CarMax ($KMX). But according to Hindenburg Research, ‘Carvana’s turnaround is a mirage.’
In a report titled ‘Carvana: A Father-Son Accounting Grift For The Ages,’ Hindenburg said for every US$1 in net income reported, the company added US$139 in market cap. Carvana allegedly fuelled its income growth with accounting manipulation and lax underwriting. Hindenburg also claims to have uncovered US$800m Carvana made in loan sales to a suspected undisclosed related party.
Maybe the biggest red flag is Carvana’s relationship with DriveTime, through which Hindenburg claims it artificially inflated revenue and lowered reported costs. DriveTime (formerly Ugly Duckling) is a private car dealership run by Carvana CEO’s father, Ernest Garcia II. (It even traded on the NASDAQ between 1996 and 2002 under the ticker ‘UGLY.’)
Carvana apparently dumps unreported costs of extended warranties on DriveTime, adding an estimated 58% in warranty income per sale. It's also able to offload cars to DriveTime instead of marking down inventory, and does so at a premium, earning US$105m in revenue over the last three fiscal years.
‘It’s kind of like Fight Club… there’s certain things we don’t talk about, and we don’t talk about DriveTime,’ a former Carvana director told Hindenburg.
Carvana shares ended last Thursday 1.8% lower after the report went live, dropped another 3.8% after hours and then fell 11% on Friday. Carvana called Hindenburg’s report intentionally misleading and inaccurate, without going into details. To be fair, after disclosing its latest short position, Hindenburg has a lot to gain from Carvana shares tanking.
The last auto company in Hindenburg’s crosshairs was Nikola Motors ($NKLA) – an electric truck maker inspired by Tesla’s ($TSLA) business model. After Hindenburg’s exposé in 2020, we learned that the company’s flagship truck was non-functional, and a promotional video showing the truck in motion was staged by rolling it downhill. That saga ended with a fraud conviction and four-year prison sentence for Nikola’s former CEO Trevor Milton, while the firm’s market cap dropped from US$20b to US$135m.
Meanwhile, similar attacks from Hindenburg against Roblox ($RBLX) and Block Inc ($SQ), claiming the companies were inflating certain metrics, have been less fruitful for short sellers.
Whether these allegations against Carvana are substantiated or not, companies targeted by Hindenburg typically see a 15% drop in trading value after such reports go live. It’s going to be a volatile road ahead for Carvana investors.
