Hindenburg shorts Carvana, calls turnaround a ‘mirage’

Noted short seller Hindenburg Research disclosed a bet against Carvana on Thursday, claiming the online used-car retailer’s recent turnaround is a “mirage” that is being propped up by unstable loans and accounting manipulation.

The report, called “Carvana: A Father-Son Accounting Grift For The Ages,” centers on Carvana’s practice of loan sales as well as the business relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, who is Carvana’s largest shareholder.

Shares of Carvana closed Thursday at $199.56, down 1.9% – marking its first close under $200 per share since October. The stock increased nearly 300% in 2023, as the company improved results and reduced costs as part of a turnaround plan led by Ernie Garcia III.

Carvana in a statement called Hindenburg’s report “intentionally misleading and inaccurate” without going into specific details.

“In the 7 years since our IPO, Carvana has been one of the most heavily researched public companies. The arguments in today’s report are intentionally misleading and inaccurate and have already been made numerous times by other short sellers seeking to benefit from a decline in our stock price,” Carvana said in an emailed statement Thursday afternoon. “We plan to stay focused on executing our plan for another great year in 2025.”

Hindenburg says it uncovered $800 million in loan sales “to a suspected undisclosed related party, along with details on how accounting manipulation and lax underwriting have fueled temporary reported income growth — all while insiders cash out billions in stock.”

Hindenburg also alleges that an increase in borrower extensions at Carvana is being enabled by the company’s loan servicer, an affiliate of private car dealership DriveTime, which is run by Garcia II. The “company seems to be avoiding reporting higher delinquencies by granting loan extensions instead,” according to Hindenburg.

CNBC could not immediately verify the claims in the Hindenburg report.

JPMorgan analyst Rajat Gupta on Friday brushed off many of the concerns in the Hindenburg report, citing many were “known unknowns that investors have been cognizant of, and have absorbed over the last several years.”

BTIG analyst Marvin Fong in an investor note late Thursday agreed: “In our view, a lot of this ground has been covered by previous short sellers as the report touched on many of the same topics … While plausible questions are raised at times, we find other arguments unconvincing.”

As noted, this is not the first time the Garcia family and its control of the company have been a target of some investors, including lawsuits in recent years alleging the Garcias run a “pump-and-dump” scheme to enrich themselves.

Carvana went public in 2017 after spinning off from DriveTime.

DriveTime was formerly a bankrupt rental-car business known as Ugly Duckling that Garcia II, who pled guilty to bank fraud in 1990 in connection to Charles Keating’s Lincoln Savings and Loan scandal, grew into a dealership network.

Most notably, Carvana still relies on the company for servicing and collections on automotive vehicle financing, and the two companies share revenues generated by the loans. The businesses also, at times, sell vehicles to each other, and Carvana leases several facilities from DriveTime in addition to profit-sharing agreements.