Carvana Co. shares dived, dropping 11% last Friday, after a scathing report from Hindenburg Research emerged, casting a heavy shadow on the company's claimed financial turnaround. The Tempe-based used car giant faced accusations from the short seller of engaging in questionable underwriting practices, alleged insider trading, and purported accounting manipulations designed to buoy their financial results. Hindenburg Research, known for its forensic financial analyses, released the report titled "Carvana: A Father-Son Accounting Grift for the Ages," crafted from what they say was a four-month investigation involving interviews with former Carvana employees, competitors, and industry experts.
The firm, not shy about its short position on Carvana's stock, described the company's resurgence from near bankruptcy in 2022 as nothing more than a mirage. According to Hindenburg's allegations, as stated in an article published by the Phoenix Business Journal, insiders took advantage to quickly "cash out billions in stock" while the company was supposedly on the mend. Ernest Garcia II, Carvana's major shareholder, and father of CEO Ernie Garcia III, was specifically mentioned to have sold a whopping $3.6 billion worth of stock between 2020 and 2021, a period when Carvana projected strong prospects.
Additionally, Hindenburg put forward concerns regarding Carvana's transparency with the sale of used car loans to what they suspect to be an undisclosed related party, as well as questioned the dealings with DriveTime and Ally Financial. The research firm accused Carvana of being "exorbitantly valued," trading much higher than its counterparts like CarMax and AutoNation. In Carvana's defense, a company spokesperson claimed that "The arguments in today's report are intentionally misleading and inaccurate," as stated in an emailed statement to Phoenix Business Journal.
Despite the turbulence Carvana's stock encountered, falling to close at $177.52 after the release of Hindenburg's report, Wall Street analysts seemed to not be swayed and maintained their ratings. Marvin Fong, a BTIG analyst, continued to advocate a buy rating with a price target at $295 per share, in a note highlighting that many of the report's concerns had been previously raised by other short sellers and finding other claims by Hindenburg unconvincing. In an article from Investopedia, Rajat Gupta, an analyst at J.P. Morgan, recommended investors to "buy the weakness," suggesting that Carvana's reported economics do not appear inflated.
To deepen the intrigue, Hindenburg pointed to significant stock sell-offs by insiders at pivotal moments, including massive sales by Ernest Garcia II and former Vice President Dan Quayle. The latter's connection to a trust affiliated with Cerberus Capital, suggested by lien filings as the previously unnamed buyer of a sizable chunk of Carvana's loans, seems to further entangle the web of transactions that has caught the attention of many in and around Wall Street. Carvana's interactions with Ally Financial also came under the microscope as the bank holding company scaled back its purchases of vehicle loans from Carvana last year.
