Car seller Carvana faces a potential new crisis as a shocking report from Hindenburg Research threatens to derail its efforts to recover from recent economic woes.
Car seller Carvana could be facing renewed scrutiny and a second potential crisis after a new report emerged accusing it of misdeeds.
Car retailer Carvana promised to shake up the way consumers bought automobiles with their novel vending machine concept which was a unique approach in a market where franchised dealerships still play a large role in the buying experience.
While the gimmick of a “car vending machine” and a nearly all online sales model raised plenty of eyebrows, the company also had to endure turmoil behind the scenes with a scandal involving vehicle titles nearly bringing the company to its knees. A new report suggests that the company could be heading for another crisis with this one having more extensive implications for Carvana.
New report comes from a troubling source
The report from short-selling firm Hindenburg Research claims Carvana is mishandling its financials and raised concerns about how its stock price went up so quickly.
This latest report comes from the short-selling investment firm Hindenburg Research with the company also being responsible for similar exposes that took down Nikola Motors and Lordstown Motors with Nikola Motors founder and disgraced CEO Trevor Milton ultimately finding himself in jail due in part to the contents of Hindenburg’s report on Nikola.
As for Carvana, Hindenburg Research left no stone unturned in its damning report calling the company “a father-son accounting grift for the age.” the report sheds concerns over Carvana’s performance as a company and the quick recovery of its stock price with the figure going from $130 a share in September to $268 a share by the end of December. In addition to the vending machine concept, Carvana also promised to create a buying landscape where buyers and sellers could complete nearly all of the purchasing process online with the company either picking up or dropping off your vehicle from your home. This process worked well during COVID with the company paying extremely high prices to make sure they had plenty of inventory for consumers to choose from. Low inventory and the high prices that were in force during the pandemic allowed the company to take advantage of pent-up demand and make a massive profit as it navigated the challenging waters COVID-19 created.
However, the auto market began returning to normal in 2022 and this course correction battered Carvana with the company’s stock losing 99% of its value, and Carvana even briefly lost the ability to sell vehicles in Illinois which temporarily cut it off from Chicago and some of the lucrative suburban communities that surround the bustling metropolis.
Impressive recovery hides potentially rocky foundations
The company’s recovery since then has been impressive. Hindenburg’s report said the dealer was worth $44 billion, “with investors believing the company’s worst days are behind it.” But Hindenburg Research says that its research “shows Carvana’s turnaround is a mirage.”
The accusations in the report mirror the same basic theme that we have seen in other Hindeburg reports and the laundry list of accusations against Carvana is no exception to this rule. Highlights in the report include a claim that Carvana paid “$800 million in loan sales to a suspected undisclosed related party” and accusing Carvana of “propping up its numbers through a grab bag of related-party accounting games,” including using its loan servicer, an affiliate of the company owned by CEO Ernie Garcia III’s father, to issue loan extensions to avoid reporting higher loan delinquencies.
In addition to these charges, Hindenburg also says that “Carvana appears to be dumping unreported costs of extended warranties onto DriveTime a dealer owned by the CEO’s father with these sales allegedly helping to prop up the income Carvana gets off of warranty-related claims.
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Carvana denies wrongdoing
Carvana for its part denied wrongdoing but the new report comes after the company weathered a scandal involving vehicle titles that saw its selling license in some states get revoked along with a long list of class-action lawsuits.
For its part, Carvana is fighting back against the report and systematically denies all the assertions made by Hindenburg Research. The company called the report and Hindenburg’s accompanying claims “intentionally misleading and inaccurate” with a company spokesperson saying Hindenburg’s assertions “have already been made numerous times by other short sellers seeking to benefit from a decline in our stock price.” On the surface, the denial seems to point to the strong leverage in stock strategy that Hindenburg has if Carvana’s stock price does fall, and when you combine that with some of the other companies the firm’s reports have managed to bring down, Carvana has a very formidable opponent in that regard.
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