Noted short seller Hindenburg Research disclosed a bet against Carvana on Thursday, claiming the online used-car retailer’s recent turnaround is a “mirage” that is being propped up by unstable loans and accounting manipulation.
The report centers on Carvana’s practice of loan sales as well as the business relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, who is Carvana’s largest shareholder.
Shares of Carvana were down about 3% Thursday. The stock increased nearly 400% in 2023, as the company improved results and reduced costs as part of a turnaround plan led by Ernie Garcia III.
Carvana declined to comment on the Hindenburg report, which was titled, “Carvana: A Father-Son Accounting Grift For The Ages.
Hindenburg says it uncovered $800 million in loan sales “to a suspected undisclosed related party, along with details on how accounting manipulation and lax underwriting have fueled temporary reported income growth â all while insiders cash out billions in stock.”
Hindenburg also alleges that an increase in borrower extensions at Carvana is being enabled by the company’s loan servicer, an affiliate of private car dealership DriveTime, which is run by Garcia II. The “company seems to be avoiding reporting higher delinquencies by granting loan extensions instead,” according to Hindenburg.
CNBC could not immediately verify the claims in the Hindenburg report.
This is not the first time the Garcia family and its control of the company have been a target of some investors, including lawsuits in recent years alleging the Garcias run a “pump-and-dump” scheme to enrich themselves.
Carvana went public in 2017 after spinning off from DriveTime.
DriveTime was formerly a bankrupt rental-car business known as Ugly Duckling that Garcia II, who pled guilty to bank fraud in 1990 in connection to Charles Keating’s Lincoln Savings and Loan scandal, grew into a dealership network.
Most notably, Carvana still relies on the company for servicing and collections on automotive vehicle financing, and the two companies share revenues generated by the loans. The businesses also, at times, sell vehicles to each other, and Carvana leases several facilities from DriveTime in addition to profit-sharing agreements.
