The ‘Amazon of Cars’ or a House of Cards? Carvana Under Fire

When it comes to raising eyebrows, Hindenburg Research knows how to deliver. The renowned short-seller has turned its spotlight on Carvana Co., the online auto retailer celebrated for transforming how Americans buy cars. This time, the attention isn’t flattering. Hindenburg’s latest report accuses Carvana of employing dubious accounting tactics, a “father-son grift” to inflate financial results while downplaying significant risks. Let’s dig into the juicy details and see what all the fuss is about.

Risky Loans and Shaky Foundations

Hindenburg’s first red flag? Carvana’s subprime loan portfolio. According to the report, Carvana’s approach to loan approvals is about as strict as a kindergarten recess. A former director even claimed the company approved virtually everyone. While that’s great news if you’re a buyer with a shaky credit score, it’s not exactly comforting for investors. Here’s the kicker: With used car prices dropping over 20% in the last three years and subprime borrowers under more financial pressure than ever, Carvana’s loan game could hit a dead end. If that’s not enough to raise eyebrows, Carvana sold $800 million in loans to a mysterious buyer tied to Cerberus Capital—a name that’s already setting off alarm bells.

Carvana’s financial troubles didn’t arise overnight. During the pandemic, the company thrived as Americans flocked to used cars amid supply chain disruptions in the new car market. By 2021, its stock price soared to $370, over 20 times its IPO value, earning it the nickname the “Amazon of cars.” But Carvana overplayed its hand. Its $2.2 billion acquisition of ADESA, a physical car auction business, was a costly misstep. Coupled with purchasing vehicles at hefty premiums, these moves piled on debt and set the stage for a major collapse when the market cooled.

Family Ties or Family Lies?

Remember that old saying, “Keep it in the family”? Carvana’s CEO Ernest Garcia III and his father, Ernest Garcia II, seem to take it to heart. Hindenburg’s report digs into some eyebrow-raising related-party transactions involving DriveTime, a dealership owned by Garcia II. According to the report, Carvana sells vehicles to DT at inflated prices to avoid markdowns and artificially enhance revenue figures.

Additionally, DT takes on significant warranty costs but reimburses Carvana in a way that makes its books look rosier than a summer sunset. And just when you thought it couldn’t get any murkier, $145 million in “other revenue” in 2023 reportedly came from related parties, with DriveTime accounting for a chunky $138 million of that. Talk about family loyalty.

Billions on the Table

Hindenburg also draws attention to substantial insider stock sales by the Garcia family. Between 2020 and 2021, the father-son duo sold $3.6 billion in Carvana stock. When Carvana’s stock surged 284% in 2024, Garcia II sold another $1.4 billion, sparking concerns about the family’s confidence in the company’s long-term prospects. The timing of these sales raises eyebrows, particularly given Carvana’s history of financial turbulence and the ongoing scrutiny of its business practices.

Kicking the Can Down the Road

When it comes to delinquent loans, Carvana seems to have found a way to hit snooze on the problem. Hindenburg’s report claims the company is extending repayment terms for borrowers, effectively sweeping delinquencies under the rug. It’s like slapping a Band-Aid on a leaky tire—temporary at best, disastrous at worst. DriveTime plays a starring role here too, servicing many of these loans and enabling Carvana’s delinquency delay tactics. But if history has taught us anything, it’s that ticking time bombs don’t stay quiet forever.

Alarming Valuation and ABS Exposure

Let’s talk numbers. Carvana’s valuation isn’t just high—it’s orbiting Mars. The company trades at an 845% higher sales multiple than competitors like CarMax and AutoNation. On top of that, its forward earnings valuation sits at a mind-boggling 754% premium. And then there’s the $15.4 billion in asset-backed securities (ABS) on Carvana’s books. A whopping 44% of these loans are non-prime, and over 80% involve “deep subprime” borrowers with some of the lowest FICO scores in the business. Alarmingly, 60-day delinquencies on “prime” loans are more than four times the industry average.

Audit Oversight and SEC Scrutiny

Carvana’s auditor, Grant Thornton, has come under fire for its oversight. A former executive at the firm stated, “We are not set up to look for fraud,” raising doubts about the reliability of Carvana’s reported financials. Adding to the pressure, Carvana is reportedly under investigation by the SEC, according to Disclosure Insight, a Freedom of Information Act intelligence firm. The company has yet to disclose the scope or status of this investigation, further fueling skepticism.

What This Means for Accounting Professionals

Hindenburg’s allegations highlight broader issues within Carvana’s business model and accounting practices. If the claims hold water, they raise significant questions about the sustainability of the company’s financial health and its ethical standards. For investors, this serves as a stark reminder to look beyond headline-grabbing growth and dig deeper into the numbers. Carvana’s story, from its meteoric rise to its recent challenges, underscores the risks of high-growth ventures relying on complex and opaque financial structures.

A Turning Point for Carvana?

Carvana, for its part, isn’t taking this lying down. The company has dismissed Hindenburg’s report as “intentionally misleading” and “inaccurate,” pointing out that similar claims have been raised and debunked before. But with insider accounts and data-backed allegations stacking up, it’s hard to brush this one off. And as Hindenburg’s report suggests, the company’s rapid ascent may be hiding a darker side. Whether these allegations mark the beginning of Carvana’s undoing or merely another bump in its controversial road remains to be seen. For now, one thing is clear: the spotlight is on Carvana, and the stakes couldn’t be higher. Stay ahead of the curve—subscribe to our newsletter for the latest insights, trends, and strategies delivered straight to your inbox!