Photo Credit: carvana.com
Carvana has become a bit of a local success story. The Scottsdale-based company had one of the most novel, moonshot ideas of our time: what if we sold cars in a vending machine? An idea that seems crazy on its face has been a wild success, with its car towers facilitating car sales all over the country.
But what if that success was built on a foundation of lies? A prominent “short-seller” research firm recently dropped a bomb accusing it as such.
Hindenburg Research recently came out with a piece named “Carvana: A Father-Son Accounting Grift For The Ages”, accusing the company of massive accounting tricks to prop up its stock price and give appearances of a healthy company.
First off, what is a short-seller? It is a firm or person that aims to profit on the fall of a stock price. They will often borrow shares of a certain stock at what they perceive to be a high price and hope that it will fall, where they will give the stock back and pocket the difference in price. Hindenburg is one of the most famous (or infamous) short-selling research firms; it will take a “short position” in a stock, release research spelling out why it thinks that a company is vastly overpriced, and hope to generate selling momentum in the stock.
Hindenburg Research believes that Carvana’s massive stock rise, vaulting from around $4 a share at the end of 2022 as bankruptcy rumors abounded to a peak of over $260 a share last year, is based on accounting gimmicks and obfuscation.
Since the totality of the charges are a lot to spell out here, we encourage you to read the report. It makes a point of mentioning that the father of the CEO and a key shareholder, Ernest Garcia II, had been found guilty of recording sham transactions in a previous business as a way of boosting the stock price. Something very similar seems to be happening here according to Hindenburg with relation to car loans, the mechanism that keeps Carvana afloat and facilitates sales.
Along with charges of self-dealing in sales to DriveTime, a company owned and operated by the aforementioned father, there are several other issues. Perhaps the most pertinent is an apparent lack of underwriting scrutiny for its car loans. In a time when car repossessions are at decade highs, this should be reflected in sales, but apparently Carvana is doing a good job (albeit potentially illegally) hiding those losses.
Carvana is innocent until proven guilty, but Hindenburg doesn’t simply make things up. This is an unfortunate development for a local darling, and it would behoove Carvana to aggressively combat these charges. Until it does, shareholders should beware.