Online used car dealership Carvana has been one of the best performing stocks in recent years, with shares quadrupling in 2024 and rising nearly 50-fold since late 2022. However, on Thursday, Hindenburg Research, a short seller known for targeting high-profile companies, released a report alleging that Carvana’s success is a “mirage” and accused company leaders Ernest Garcia II and Ernest Garcia III of running an “accounting grift for the ages.” This led to a 2% drop in Carvana’s stock on Thursday, while major stock indices also saw a slight decline.
The allegations against Carvana primarily focus on related-party accounting games involving DriveTime Automotive, a chain of used car dealerships owned by Garcia II. Carvana and the Garcias have faced scrutiny in the past over corporate governance and financial accounting concerns, which the company has denied and fought in court. Hindenburg’s report, however, presents a new finding that Carvana is hiding dealings with Cerberus Capital Management, a private equity firm with $60 billion in assets.
Hindenburg claims that Carvana sold $800 million of auto loan receivables to a third party, which they believe is controlled by Cerberus. The report raises concerns about the lack of transparency around these transactions, especially given that former U.S. Vice President Dan Quayle, who joined Carvana’s board after its 2017 IPO, is also a senior executive at Cerberus. Carvana has denied that the buyer is a related party and dismissed the report’s claims as misleading and inaccurate.
The alleged Cerberus-Carvana dealings shed light on the political influence of Stephen Feinberg, the founder of Cerberus, who has held positions in the U.S. government. Carvana has been under investigation by the U.S. Securities and Exchange Commission since at least March 2020, when the company disclosed the investigation in a public filing. Cerberus declined to comment on the allegations, and former Vice President Quayle did not respond to a request for comment.
Despite its history of disputes and legal challenges, Carvana’s ability to sell auto loans to third-party buyers is crucial to its business model. The company generates most of its income from selling auto loans in asset-backed securities, with Ally Financial being its largest buyer. However, data shows that Ally has decreased its purchases from Carvana, citing credit challenges in its retail auto loan book. This has raised concerns about Carvana’s subprime loans and potential risks to investors.
Some experts believe that the alleged Cerberus partnership may not legally be considered a related party transaction, but the concerns raised by Hindenburg’s report still have implications for Carvana’s underlying business. With a significant portion of its loans underwater and rising borrower extensions, there are fears that Carvana’s lax loan underwriting standards could lead to a crisis similar to the housing bubble before the 2008 Financial Crisis. These concerns have raised questions about the long-term sustainability of Carvana’s business model and its ability to weather potential financial challenges in the future.
