Polarizing activist firm Hindenburg Research, known for its sensational reports on corporate fraud and other malfeasance by companies including Nikola Corp. NASDAQ: NKLA and the Indian Adani Group – an article published on January 2, 2025 about its latest target: Carvana Co. New York Stock Exchange: CVNA.
Karvana today
As of 5:45 pm ET
- 52 week range
- $40.21
▼
$268.34
- P/E ratio
- 17,733.73
- Target price
- $229.18
In the report, Hindenburg argued that the $44 billion online auto dealer’s 284% rise in shares through 2024, seen by some investors as a major turnaround after fears of bankruptcy in 2022 and 2023, is a “mirage.” At the heart of the Hindenburg report is the allegation that Carvana engaged in accounting manipulation and careless lending to create the appearance of revenue growth in recent quarters. As is customary, Hindenburg also announced at the time of the report that it had taken an undisclosed short position in CVNA stock.
Allegations of suspicious loan sales and inflated revenues and profits
Hindenburg claims to have discovered $800 million in loan sales to an “alleged undisclosed related party” because Carvana’s previous purchase commitment agreement with Ally Financial had changed in recent years in ways that were unclear to outsiders. Carvana sold $3.6 billion of auto loans to Ally in 2023, about 60% of its total loans originated. However, Ally’s sales fell during the first three quarters of 2024 to about 35% of Carvana’s sales, or $2.2 billion during that period.
The Hindenburg report said the unnamed buyer of $800 million in additional loans in the first quarters of 2024 is likely a trust affiliated with Cerberus Capital—that company’s Global Investments chairman Dan Quayle is a director of Carvana.
Additionally, Hindenburg alleges that Carvana’s model is focused on subprime and subprime loans and that its “toxic loan portfolio is the result of lax underwriting standards,” resulting in the auto dealer issuing more than $15.4 billion in asset-backed securities. The report also found that 60-day delinquencies among Carvana borrowers are more than four times the industry average.
The report alleges that Carvana used accounting “games” to create the appearance of higher revenue and profit figures. These include the use of borrower extensions to avoid loan delinquencies and a number of manipulations involving DriveTime (the dealership run by the Carvana CEO’s father), including profit-sharing agreements between the two companies, as well as Carvana’s history of offloading the costs of extended warranties and even excess inventory in DriveTime. The report also quotes a former Carvana executive who argued that the company would manipulate revenue numbers by withholding loan sales during the quarter.
Meanwhile, Hindenburg claims that Carvana’s CEO and his father timed the market with incredible accuracy, allowing them to make billions by selling Carvana stock.
Valuation and debt issues
The Hindenburg report also points to potential investor concerns about Carvana, even without considering its alleged “fraud.” At the time of the report, Hindenburg said Carvana shares are trading at an 845% premium to its peers based on one-year forward P/S and a 754% premium on one-year forward P/E. The company had net debt of $4.8 billion at the end of September 2024, with cash interest payments of $215 million per year due beginning in February 2025 on a long-term debt basis. In addition, Carvana’s B- credit rating is also the lowest among its peers.
Karvana Company (CVNA) Price chart for Friday, January 3, 2025.
Carvana: review, business model, bankruptcy fears
Founded in 2012, Carvana is an online auto dealership that operates a platform through which individual customers can buy and sell used cars. Activities on this platform make up the majority (about 70%) of the company’s business by revenue, with other operations including services such as insurance, financing and protection plans. Finally, Carvana operates a wholesale auction business called ADESA. Carvana had an IPO in 2017.
In a recent investor presentation, Carvana noted that it reaches more than 81% of the U.S. population and has more than 45,000 vehicles for sale as of September 30, 2024.
However, relatively recently the company had concerns about possible bankruptcy. For example, it aimed to reduce debt by $1.3 billion in September 2023 as part of a major restructuring. This, along with efforts to achieve positive EBITDA and roughly triple gross profit per retail vehicle unit from September 2022 to September 2024, likely contributed to the significant rally over the past few months.
As of January 3, 2025, Carvana has yet to issue a press release regarding the Hindenburg Report.
Before you consider Carvana, you might want to hear this.
MarketBeat tracks Wall Street’s top-rated and best-performing analysts daily and the stocks they recommend to their clients. MarketBeat identified five stocks that top analysts were quietly telling their clients to buy now, before the broader market caught on… and Carvana wasn’t on the list.
While Carvana currently has a Hold rating among analysts, the top-ranked analysts think these five stocks are Strong Buys.
View five stocks here
Discover the next wave of investment opportunities with our report, 7 Stocks That Will Be Great in 2025. Explore the companies poised to emulate the growth, innovation and value creation of the tech giants dominating today’s markets.
Get this free report