Introduction

Carvana, an online car dealership with a staggering valuation of $44 billion, has risen from the brink of bankruptcy risks in 2022 and 2023 to see its stock soar by 284% in 2024. Investors are flocking to the firm, hoping it has turned a corner after a bleak few years. But Hindenburg Research's extensive investigation suggests that this resurgence may not be what it appears.

Valuation Concerns: A Stock Significantly Overpriced?

Carvana’s stock trading at an eye-popping 845% premium to its peers CarMax and AutoNation raises eyebrows. With approximately $4.8 billion in net debt and receiving a junk rating from credit agencies, the company's valuation seems overly ambitious against a backdrop of economic stress in the auto industry. The Manheim Price Index reported a 20.3% decline in used vehicle prices over the last three years, coupled with alarmingly high subprime auto loan delinquencies now exceeding rates during the Global Financial Crisis.

A Queer Pattern: The Garcia Family's Stock Sales

Historically, the Garcia family’s stock trades have coincided with financial downturns—a trend that seems to be repeating itself. After Ernest Garcia II sold $3.6 billion in stock prior to a significant stock price drop in 2021, he has continued to sell aggressively, offloading $1.4 billion in shares since the beginning of 2023. Observers are raising questions about the motives behind this timed selling amid Carvana's assertions of a bright future.

Major Headwinds: A Decline in Loan Sales and Accountability Issues

Carvana’s business model also faces major headwinds—most notably through its reliance on third-party financing. The company has recently acknowledged that 26% of its gross profits stem from loan sales to these partners, particularly the high-risk subprime market. Furthermore, Ally Financial, which used to be a major financing partner, dramatically reduced its purchases from Carvana this year, indicating a potential loss of crucial financial support.

To make matters more suspicious, an unnamed buyer has emerged, accounting for a significant portion of Carvana's loan sales. Hindenburg's investigation hints that this buyer may be a related party, casting doubt on the transparency of its operations.

The Accounting Games: Manipulating Financial Reports for Favorable Metrics

Concerns also arise from Carvana’s reported financial metrics, which have seemingly improved amidst rising delinquencies and loan defaults. Allegations of "cookie jar accounting" come to light, whereby the firm might inflate profits by delaying loan sales to manipulate quarterly earnings.

The cozy relationships with related parties add another layer of concern—whether it be the inflated warranty income from a related dealership or questionable inventory sales to keep losses off the books. These tactics lead to the conclusion that Carvana is engaging in elaborate accounting maneuvers to maintain its stock price.

Conclusion: Carvana’s Future Is in Jeopardy

The broader implications of these findings raise serious questions about Carvana’s future viability. While the Garcia family has profited substantially from their stake inCarvana, shareholders might be left holding a deteriorating asset trapped in a web of suspect accounting and financial mismanagement. As investigations continue to unfold and external market realities set in, Carvana finds itself at a precarious crossroads that may spell disaster for investors.

As always, potential investors are advised to conduct their own due diligence before making financial decisions about the company.