Warning Signs: Carvana’s Turnaround May Be Built on Shaky Ground
A Closer Look at the Online Used-Car Retailer’s Practices
Carvana, the online used-car retailer, has been on a tear lately, with its stock price surging nearly 400% in 2023. However, a new report from Hindenburg Research, a noted short seller, suggests that the company’s recent success may be nothing more than a house of cards.
Unstable Loans and Accounting Manipulation
Hindenburg alleges that Carvana’s turnaround is being propped up by unstable loans and accounting manipulation. The report highlights the company’s practice of selling loans to a suspected undisclosed related party, which has resulted in $800 million in loan sales. Furthermore, Hindenburg claims that Carvana’s accounting practices are lax, and that the company is using loan extensions to avoid reporting higher delinquencies.
Family Ties and Conflicts of Interest
At the heart of the issue is the close relationship between Carvana’s CEO, Ernie Garcia III, and his father, Ernest Garcia II, who is the company’s largest shareholder. The elder Garcia also runs DriveTime, a private car dealership that has a significant business relationship with Carvana. The two companies share revenues generated by loans, and Carvana leases several facilities from DriveTime.
A History of Controversy
This is not the first time the Garcia family has faced scrutiny. In recent years, lawsuits have alleged that the Garcias run a “pump-and-dump” scheme to enrich themselves. Ernest Garcia II has also pled guilty to bank fraud in the past, in connection with the Lincoln Savings and Loan scandal.
What’s Next for Carvana?
Carvana declined to comment on the Hindenburg report, but the allegations are certainly troubling. If true, they could have serious implications for the company’s future. With its stock price already taking a hit, investors will be watching closely to see how Carvana responds to these allegations.
A Cautionary Tale
The Carvana saga serves as a reminder to investors to always do their due diligence and to be wary of companies with complex business relationships and questionable accounting practices. As the old adage goes, “if it seems too good to be true, it probably is.”
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