"Hedge against India": Hindenburg targets Wall Street darling: used car dealer Carvana is a "century accounting fraud"

Hindenburg Research, known for shorting Asia's richest man Adani, released a report on Thursday stating that it is shorting the used car dealer Carvana, calling the company a "century-long accounting fraud by a father-son duo."

Nathan Anderson, founder of Hindenburg, stated that after conducting "extensive document reviews and interviews with 49 industry experts, former Carvana employees, competitors, and stakeholders," the firm firmly believes that Carvana's "transformation is an illusion."

The firm wrote in the report: "Our research found that the company sold $800 million in loans to suspected undisclosed related parties while using accounting manipulation and lax loan approvals to drive temporary revenue growth, while insiders took the opportunity to cash out billions of dollars in stock."

"Even without considering our latest findings, Carvana's valuation is already absurdly high, with its sales multiple exceeding that of online car peers CarMax and AutoNation by 845%, and its future earnings premium by 754%.

Currently, Carvana carries about $4.8 billion in junk-rated debt. Carvana's business has faced significant headwinds. According to the Manheim Price Index, used car prices have dropped by 20.3% over the past two years. According to Fitch data, the delinquency rate on subprime auto loans is now higher than during the global financial crisis."

However, this short report seems to have little impact on Carvana's stock price. Although the stock fell as much as 8% in early trading on Thursday, it later rebounded, trading at $203.39 at midday, up 0.015%.

To reduce reliance on major financing parties, but not disclose new loan buyers

Hindenburg questioned Carvana's partnerships: "Carvana relies on purchase commitment agreements with Ally Financial, having sold $3.6 billion in auto loans to it in 2023, accounting for about 60% of its total loan issuance. Carvana has indicated to investors that it seeks to reduce its dependence on Ally, but has not announced any new financing partners in the past six years."

The report continued: "Over the past two years, Ally's loan portfolio has become increasingly concentrated, with Carvana loans rising from 5% to 8.4% of its consumer auto portfolio. In September 2024, Ally warned investors of 'increasing credit challenges in retail auto loans,' subsequently dropping by 20%."

Hindenburg pointed out:

"As of September 2024, Ally has reduced its purchases of Carvana loans. In the first nine months of this year, Carvana sold $2.15 billion in loans to Ally (approximately $2.86 billion on an annualized basis), accounting for only 35% of total issuance. In contrast, loans sold in 2023 amounted to $3.6 billion, accounting for 60% of total issuance Anderson's team is now questioning who is buying Carvana's loans: "With Ally's withdrawal, a new, unnamed buyer has quietly emerged at a time when Carvana needs funding the most. Over the past two quarters, Carvana sold $800 million in loans to an 'unrelated third party.' This mysterious buyer accounted for 18.3% and 16.3% of total loan sales in the second and third quarters of 2024, respectively."

The report points out:

"Mortgage documents indicate that this buyer may be a trust associated with Cerberus Capital, and Carvana board member Dan Quayle is the chairman of global investments at Cerberus, suggesting that the new buyer may be an undisclosed related party, contrary to the company's statements."

Poor Performance, Insiders Eager to Cash Out

Hindenburg also emphasized: "Previously, Carvana CEO Ernie Garcia III's father, Ernest Garcia II, sold $3.6 billion in stock between August 2020 and August 2021. After stopping the sales, Carvana's stock price plummeted 99% within a year and soon faced bankruptcy risks."

"Since 2023, we have seen a repeat of this scenario: Despite significant pressures in the used car market, Carvana continues to promote a bright outlook and reported a modest net profit of $24.5 million for three consecutive quarters. For every $1 of net profit reported, the company's market value increased by $139, totaling an increase of $34 billion in market value. As Carvana's stock price surged about 42 times, Ernest Garcia II sold another $1.4 billion in Carvana stock.

While insiders are offloading shares, the company's solvency risk remains. About 26% of Carvana's gross profit comes from selling customer auto loans to third parties, most of which are high-risk subprime and deep subprime loans. Over the past nine months, the proceeds from loan sales have been 2.2 times Carvana's net profit."

Record Profits in Last Year's Third Quarter

However, Carvana's third-quarter report released at the end of October last year significantly exceeded expectations, setting a record high for profits, while just two years ago, Carvana faced bankruptcy risks. The financial report showed that Carvana's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $429 million, far exceeding analysts' expectations of $326.8 million and $148 million in the same period last year. Carvana also stated that "as long as the environment remains stable," profits in 2024 will be "substantially above" the previously forecasted upper levels.

A previous article from Wall Street Insights mentioned that, facing high interest payments and upcoming debt maturities, Carvana CEO Ernie Garcia negotiated with banker Ken Moelis and creditors, firmly persuading them to accept a $1.3 billion overall debt reduction in mid-2023. Additionally, the company successfully secured the opportunity to defer some cash interest payments In addition, Garcia has increased his stake in Carvana, and this breathing opportunity has allowed the company to cut costs in 2023—through most of 2023, Carvana has been shrinking its business, restructuring its debt, and expanding used car sales. The company stated that in less than three years, the indirect sales cost per vehicle for Carvana has decreased from $6,300 to less than $3,800.

Despite the encouraging financial report, Carvana still faces high risks, with financial and operational leverage at elevated levels. It is reported that the company has a small bank internally responsible for issuing and selling auto loans