Categories: Business

Hindenburg drops Carvana, calls change a “fata morgana”

PHOTO | Future publishing | Getty Images

Well-known short seller Hindenburg Research announced a bet against it Caravan on Thursday, claiming the online used car retailer's recent turnaround was a “mirage” supported by unstable loans and accounting manipulation.

The report, titled “Carvana: A Father-Son Accounting Grift For The Ages,” focuses on Carvana's practice of credit sales as well as the business relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, Carvana's largest shareholder.

Carvana shares closed Thursday at $199.56, down 1.9% – marking their first close below $200 a share since October. The stock rose nearly 400% in 2023 as the company improved results and cut costs as part of a turnaround plan led by Ernie Garcia III.

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

“In the seven years since our IPO, Carvana has been one of the most closely scrutinized public companies. The arguments in today's report are intentionally misleading and inaccurate and have been made numerous times by other short sellers seeking to profit from a decline in our IPO stock price,” Carvana said in an emailed statement Thursday afternoon. “We plan to continue to do so to focus on executing our plan for another great year in 2025.”

Hindenburg says it uncovered $800 million in loan sales “to a suspected unnamed related party,” along with details about how accounting manipulations and lax underwriting caused a temporary increase in reported revenue – all while insiders are paying out billions of dollars in shares.”

Hindenburg also alleges that an increase in loan extensions at Carvana is being facilitated by the company's loan servicer, a subsidiary of private auto dealer DriveTime, which is operated by Garcia II. “The company appears to be avoiding reporting higher delinquencies by instead granting credit extensions,” Hindenburg said.

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

This is not the first time that the Garcia family and their control of the company have become the target of some investors. In recent years, there have been lawsuits alleging that the Garcias operate a “pump-and-dump” scheme to enrich themselves.

Carvana went public in 2017 after spinning off DriveTime.

DriveTime was once a bankrupt rental car company called Ugly Duckling, from which Garcia II, who pleaded guilty to bank fraud in 1990 in connection with Charles Keating's Lincoln Savings and Loan scandal, developed a dealer network.

Notably, Carvana still relies on the company to service and collect automobile financing, and the two companies share the revenue generated from the loans. The companies also occasionally sell vehicles to each other, and Carvana leases several of DriveTime's facilities in addition to profit-sharing arrangements.