Is Carvana's Turnaround for Real?

Hindenburg Research has taken a stand against Carvana, the online used car retailer, claiming that its recent turnaround is not as solid as it seems. On Thursday, Hindenburg revealed that it has bet against Carvana, stating that the company's improved results and cost-cutting measures are being supported by shaky loans and sketchy accounting practices. The focus of the report is on Carvana's loan sales and the close relationship between CEO Ernie Garcia III and his father, Ernest Garcia II, who is Carvana's largest shareholder. The investigation hints at a possible conflict of interest with loans worth $800 million being sold to an undisclosed related party. Carvana's stock price took a hit, dropping by about 3%, after the report was released. In 2023, the company's stock had seen a significant increase, jumping nearly 400%, as it worked on its turnaround plan led by Ernie Garcia III. However, Hindenburg's allegations suggest that this growth might be temporary, fueled by insiders cashing out substantial amounts in stock.Hindenburg also raised concerns about Carvana's loan extensions, which it claims are being granted to avoid reporting higher delinquencies. The company's loan servicer, affiliated with private car dealership DriveTime, is run by Garcia II. This has led to speculation that the company is trying to hide its true financial state. This isn't the first time the Garcia family has faced scrutiny. There have been lawsuits in recent years alleging that they run a "pump-and-dump" scheme to benefit themselves. Carvana, which went public in 2017, originally spun off from DriveTime, a company with a questionable past. DriveTime was once a bankrupt rental-car business called Ugly Duckling. Garcia II, who pleaded guilty to bank fraud in 1990, turned it into a dealership network. Today, Carvana still relies heavily on DriveTime for various services, including vehicle financing, loan collections, and profit-sharing agreements. The close relationship between the two companies has raised eyebrows, as it could potentially mask financial issues.