Carvana Is Cooking Its Books, Hindenburg Research Claims

Carvana may be a house of cards. That’s according to investment research and activist short-selling firm Hindenburg Research (never a good sign to be the subject of ire from a company named after a famous disaster), which published a report on Thursday that accuses the online used car seller of “accounting manipulation” stemming from unstable loans that it is using to temporarily prop up its prospects while its father-son ownership team cashes out.

The report, titled “Carvana: A Father-Son Accounting Grift For The Ages” claims that Carvana’s miraculous turnaround over the last two years, which has seen the company’s stock nearly 10x in 2023 and climbed another 300% in 2024 after staring down bankruptcy in 2022, is nothing but a “mirage.” Hindenburg Research claims that as the share price has skyrocketed, the father of Carvana’s CEO has cashed out more than $1.4 billion in stock.

At the center of the alleged scheme appears to be some self-dealing, but to understand the alleged shadiness, it’s important to first understand how the business model works.

When people buy a car from Carvana, a loan originates from the retailer, but it then sells those loans to other companies. Its primary buyer for those auto loans was Ally Financial, but the bank has since pulled back on its partnership. This may be in part because Carvana’s underwriting practices on those loans have been historically suspect. Hindenburg notes that Wells Fargo—a company that has mastered the art of scammy financial dealings—called off a partnership with Carvana in 2019 because “Their underwriting practices were not something that we were particularly comfortable with.”

What exactly is happening in Carvana’s underwriting process? Basically, a rubber stamp, according to the report. A former director at Carvana told Hindenberg, “We actually approved 100% of applicants we didn’t decline for compliance reasons.” About half of all of Carvana’s loans are subprime, per Hindenburg, and 80% of those are “deep subprime”, which is the the riskiest rating available. Even the company’s so-called “prime” borrowers have a 60-day delinquency rate four times higher than the industry average.

All that to say, Carvana car loans are a major risk. Yet the company has found a new buyer for them even as Ally and others turn away. According to Hindenburg’s research, Carvana has sold $800 million in auto loans to what the company has called an “unrelated third party.”  The thing is, though, Hindenburg doesn’t think this buyer is “unrelated.” The firm believes Carvana is selling its loans to an affiliate of DriveTime, a private car dealership that is owned by Ernest Garcia II—the father of Carvana CEO Ernie Garcia III and the largest shareholder in the car seller.

Hindenburg believes that this loan servicer is granting loan extensions to its borrowers in order to make it appear like more of the company’s loans are in good standing when they would otherwise be considered delinquent and risk-laden.

So per Hindenburg’s digging, it seems like Carvana may have manufactured its incredible turnaround by simply approving practically every loan request that came across its desk. This juiced sales and investors rallied behind the company, pushing its stock price to new highs. Meanwhile, Ernest Garcia II started selling off his stock, pocketing over a billion as bag holders poured in.

“Overall, we think the Garcias will leave shareholders with nothing,” Hindenburg’s report concludes. “At any point in Carvana’s two incredible stock runs, it could have raised significant capital and de-risked its balance sheet. Instead, the company has pushed off creditors and engaged in accounting games while the CEO’s father dumps billions in stock.”