Hindenburg Research shorts Carvana, alleging ‘accounting grift for the ages’

Carvana Co. was accused by prominent short-seller Hindenburg Research of impropriety in a report alleging that the auto retailer’s subprime loan portfolio carries substantial risk and its growth is unsustainable.

Hindenburg took a short position on Carvana’s stock after conducting research that included interviewing former employees. The report, titled: “Carvana: A Father-Son Accounting Grift for the Ages,” makes several claims, including that Carvana has lax underwriting standards and uses a company owned by the father of Chief Executive Officer Ernest Garcia III to boost results.

Carvana’s shares declined 1.9% at the close in New York. The stock surged 284% last year as improving results increased optimism that the company was on the right track after worries about its debt load and losses.

For its part, Carvana said the allegations are nothing new.

“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,” a company spokeswoman said in an email. Since its initial public offering seven years ago, Carvana has been one of the most heavily researched public companies, she said. 

The report’s overarching claim is that Carvana is using dubious tactics to help results, while hiding from investors the risk of its loan portfolio. This, according to the report, is being done to lift shares and allow Garcia and his father, Ernie Garcia II, to profit. 

Insider trades have been closely watched at Carvana. The father-and-son duo sold $3.6 billion in stock between August 2020 and August 2021, the report said. And when shares surged last year, the elder Garcia sold another $1.4 billion.

Loan approvals

In the report, Hindenburg said a former Carvana director claimed that the company approved 100% of its loan applicants. The research firm also said that selling off these loans — a key source of revenue for the company — will become increasingly difficult.

Hindenburg, which has a history of going public with deep research to back short positions, also claimed Carvana manipulated its results by selling cars to DriveTime, a car dealer owned by Ernie Garcia II. That allows Carvana to avoid markdowns by selling to DriveTime at a premium, the firm said.

The retailer also had the highest increase in borrower extensions of any subprime issuer, according to the report. This is enabled by an affiliate of DriveTime, which is the servicer of some Carvana loans, the report claims. By extending terms, Carvana is able to avoid reporting higher delinquencies, Hindenburg said.

The short seller also said that Carvana gets generous reimbursements from DriveTime on its extended warranty plans and that it absorbs a lot of the costs. That helps Carvana report better financial results, according to the report.