Recently, a subscriber contacted me asking for my views on Carvana (CVNA). Since the height of the SMCI drama from August to November last year, I have been asked about CVNA multiple times. Every time I had the following response:
If there is anything funky going on, it may exist in the use of the multitude of VIEs (Variable Interest Entities), related parties, and accounts receivable sales.
I couldn’t find any smoking guns in any of those. There is no “there-there” to even investigate.
Coincidentally, Hindenburg Research published a report on CVNA in January highlighting some issues in the areas I mentioned above. The stock fell after the report was released. I didn’t agree with the analysis, the stock rebounded, and a few days later, Hindenburg shut shop.
In any event, Hindenburg, as is customary with them, did a good job with their CVNA report. I will use their summary of CVNA to set the stage for this article.
Carvana is a $44 billion online car dealer founded in 2012. Its main business is an online platform that allows retail customers to buy and sell used cars.
Despite facing bankruptcy risks in 2022 and 2023, Carvana’s stock spiked 284% in 2024, with investors believing the company’s worst days are behind it.
However, our research, including extensive document review and 49 interviews with industry experts, former Carvana employees, competitors and related parties of the company, undertaken over the course of 4 months, shows Carvana’s turnaround is a mirage.
Our research uncovered $800 million in loan sales to a suspected undisclosed related party, along with details on how accounting manipulation and lax underwriting have fueled temporary reported income growth – all while insiders cash out billions in stock.
Even before considering the findings of our investigation, Carvana is exorbitantly valued, trading at an 845% higher sales multiple relative to online car peers CarMax and AutoNation, and a 754% premium on a forward earnings basis. The company has ~$4.8 billion in net debt and is junk-rated by ratings agencies.
Carvana’s business already faces major headwinds. Used vehicle prices have declined 20.3% in the past 3 years, according to the Manheim Price Index. Subprime auto loan delinquencies are now higher than during the Global Financial Crisis, per Fitch.
Previously, Carvana CEO Ernie Garcia III’s father, Ernest Garcia II, sold $3.6 billion in stock between August 2020 and August 2021. In the year after he stopped selling, Carvana’s stock plunged 99% and faced bankruptcy concerns shortly thereafter.
Since 2023 we see the same trend: Carvana has touted a bright future and posted three consecutive quarters of modest positive net income, an aggregate of $245 million, despite stress in the used auto market.
For every $1 in net income it reported, the company has added $139 in market cap – a $34 billion market cap increase. With Carvana shares up ~42x, father Ernest Garcia II has sold another $1.4 billion in Carvana stock.
As insiders unload stock, the company’s solvency risks remain. Almost 26% of Carvana’s gross profit consisted of sales of customer auto loans to third parties, largely in the risky subprime and deep subprime space. Gain on loan sales represented 2.2x Carvana’s net income in the past 9 months.
Carvana has relied on a purchase commitment agreement with Ally Financial, to which it sold $3.6 billion of vehicle loans in 2023, ~60% of its total originations.
Carvana has told investors for at least 6 years that it is seeking to diversify outside of its relationship with Ally, but thus far has not announced new financing partners.
As subprime auto has declined, Ally has amended its arrangement with Carvana 5 times in the last two years. Each time, Carvana redacts crucial information that would help investors understand the terms of the relationship.
Over the last 2 years, Ally’s loan book has become increasingly concentrated, with Carvana loans rising from 5% of its consumer auto portfolio to 8.4%. In September 2024, Ally’s stock fell 20% after warning investors that “on the retail auto side, our credit challenges have intensified”.
Sales to Ally have scaled back year to date through September 2024. Carvana sold $2.15 billion of loans to Ally in the period (~$2.86 billion on an annualized basis), only 35% of total originations. This compares to $3.6 billion in loans or 60% of total originations in 2023.
One Ally executive told us: “We’ve pulled back from them [Carvana] pretty significantly in 2024. Ally’s Carvana purchase commitment extends to January 2025, posing a near-term risk to Carvana’s business model should it renegotiate on less-favorable terms.
With Ally pulling back, a new, unnamed buyer has quietly emerged exactly when Carvana needed it. In the past two quarters, Carvana sold $800 million in loans to an “unrelated third party.” The mystery buyer made up 18.3% and 16.3% of total loan sales in Q2 and Q3 2024.
Lien filings reveal the buyer is likely a trust affiliated with Cerberus Capital, where Carvana Director Dan Quayle is Chairman of Global Investments, indicating the new buyer is an undisclosed related-party, contrary to the company’s claims.
These suspected financing games are occurring as Carvana faces major economic headwinds— 44% of loans for cars purchased since 2022 are underwater, per a recent survey from CarEdge.
Carvana’s “originate to sell” model is highly skewed to packaging non-prime and subprime borrower loans. Per a former Carvana director: “I don’t think the model is much different than what we saw with kind of the early 2000 mortgage-backed securities”.
Almost 44% of Carvana’s loans it sells in ABS deals are non-prime. Over 80% of its recent non-prime ABS deals have weighted average FICO scores in the “deep subprime” range, the riskiest levels, per Morningstar data.
Carvana’s toxic loan book is a result of lax underwriting standards: “We actually approved 100% of the applicants”— interview with a former Carvana director describing virtually non-existent underwriting standards.
Carvana has issued over $15.4 billion of asset-backed securities (ABS), which it retains partial interest in on its balance sheet. 60-day delinquencies across its supposedly “prime” borrowers are over 4x industry averages.
A former Ally executive told us: “Those numbers… my heart might have skipped a few beats…. Those loss numbers are high. The delinquencies across 30/60 buckets are high.”
Carvana’s subprime loans had the highest increase in borrower “extensions” of any subprime auto issuer, a major sign of stress, per S&P data. Carvana’s extensions more than doubled this year, while most peers saw declines.
With its market collapsing, Carvana has propped up its numbers through a grab bag of related-party accounting games.
For example, Carvana’s increase in borrower extensions is enabled by its loan servicer, an affiliate of private car dealership DriveTime, run by Carvana’s CEO’s father. The company seems to be avoiding reporting higher delinquencies by granting loan extensions instead.
In another example, in 2023, $145 million of “other revenue” or ~8.4% of gross profit came from related parties. This included $138 million of commissions and profit-share from DriveTime.
Carvana appears to be dumping unreported costs of extended warranties onto related-party DriveTime, resulting in artificially inflated revenue and profitability. We estimate Carvana reports ~58% more warranty income per sale due to the relationship.
A former Carvana leader told us that warranty reimbursements from related-party DriveTime were “pretty generous… back to Carvana” as a way of showing better revenue to public investors.
A former director told us: “As a related-party, we’re [Carvana] able to kind of have an agreement that is favorable to pull as much of that profit forward.”
Additionally, instead of marking down inventory, Carvana can offload cars to related-party DriveTime at a premium. Over the last three fiscal years, Carvana has generated $105 million revenue from selling cars wholesale to DriveTime.
A former Carvana director responsible for wholesale inventory told us: “[Selling cars to DriveTime is] a lever that’s not talked about. It’s kind of like Fight Club… there’s certain things we don’t talk about, and we don’t talk about DriveTime.”
Carvana engaged in “sham” deals with DriveTime, along with numerous other improprieties, per allegations in a 2024, 332-page amended class action lawsuit brought by two pension funds, which included information from 12 confidential witnesses.
These sketchy related-party dealings seem to be enabled by conflicted board members. Carvana’s “independent” audit committee has two individuals that served on the board of related-party DriveTime.
One “independent” member of the audit committee, Greg Sullivan, was previously suspended by the New York Stock Exchange after he sent money to Carvana’s CEO’s father in contravention of a prohibition order, per legal records.
Carvana’s CEO’s father, the key shareholder dumping billions in stock, previously pled guilty to felony bank fraud over allegations that he helped a company report fake accounting income through sham transactions. SEC charges also alleged he “signed a falsified letter for [the company’s] auditors”.
In addition to the grab bag of related-party tricks, Carvana exhibits a litany of other accounting issues.
Carvana’s CEO has said: “We don’t end up taking the credit risk over an extended period of time.” Yet Carvana’s loans held on its books have increased 50% since 2021, to $553 million in Q3 2024. Carvana uses an accounting treatment that records no loss reserves on these loans at booking.
A former executive confirmed that Carvana could “move very large amounts of income around quarter to quarter” by holding loan sales over the quarterly line.
For example, on May 4th, Carvana reported Q1 2023 earnings, showing a 41% y/y decline in loan sales, swinging to negative adjusted EBITDA amidst bankruptcy concerns. CEO Ernie Garcia blamed the delayed loan sales on “uncertainties” in the securitization market.
Against this backdrop, with the stock price depressed, the Garcias signed an agreement to purchase $126 million in Carvana stock on July 17th, 2023.
Two days later, Carvana announced the “best quarter in company history,” featuring a massive earnings beat from re-accelerated loan sales, as well as the successful restructuring of its debt. The Garcias are up ~$427 million on those precisely-timed purchases.
In Q3 2024, Carvana reported $3,497 in retail gross profit per unit, a key metric for investors to understand the profitability from the sale of retail units.
Carvana inflates this key metric by ~34.5% by dumping an estimated $390 million of selling costs into SG&A annually, in stark contrast to accounting practices at competitors.
In August, 2023, Carvana told investors its cost reduction measures did not impact quality. But a former reconditioning leader told us otherwise: “They did make an adjustment to the standards, but only for that segment. They call it their economy line. I don’t think they talk about that.”
Overseeing all this for 10+ years is Carvana’s mid-tier auditor, Grant Thornton, which also has/had a relationship with related-party DriveTime. “We are not doing what the market thinks. We are not looking for fraud… we are not set up to look for fraud” – Former Grant Thornton UK CEO.
Finally, Carvana is subject to an undisclosed SEC investigation, per Disclosure Insight, a Freedom of Information Act (FOIA) intelligence firm. We think the company should clarify to the market whether it has faced SEC investigations and their status.
Overall, we think the Garcias will leave shareholders with nothing. 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. We think Carvana is truly an accounting grift for the ages— we see rough times ahead for both stockholders and bondholders.
Source: Hindenburg Research - 01/02/2025
Lots to unpack there. However, it is pretty straightforward and simple.
The father selling stock into a euphoric rally is his choice. It is a free country. If investors are willing to bid up the stock despite the insider selling, it is the investors’ problem, not the insider selling the shares.
Selling accounts receivable or packaging them in ABS and offloading them sheltered within VIEs is legal. It is all very clearly disclosed. As much as this financing activity is CVNA’s strength, it is also its Achilles heel. More on that below.
Transactions with DriveTime are contractually legal and properly disclosed. The wholesale purchases by DriveTime are done via a competitive bidding process. If DriveTime is overbidding, it is DriveTime’s problem unless there is underhanded roundtripping going on, of which there is no proof.
The supposed related party sale of some receivables to Dan Quayle’s (Director of CVNA) affiliated company was clearly proven to be an arm's length transaction. If it was not, where is the proof it was not?
Ally continues to do business with CVNA and has recently committed to purchase receivables of up to $4.0 billion by April 29, 2026.
I was not surprised that CVNA recovered within a day after the Hindenburg report was released. However, there are some risks that investors should be aware of. Before we get to that, let’s look at the drivers of the CVNA’s turnaround.
The Turnaround
A picture is worth a thousand words. Judge for yourself.
Source: Carvana 2025 Q1 Shareholder Letter - Page 4
Plateauing Growth
Over the last four years, CVNA’s sales have been flat. Given the fact that the average age of passenger vehicles on the road is 14.5 years today, people are delaying purchases of new and used vehicles. This should be of concern as growth in unit sales is the key to future earnings growth, as levers for cost optimization are all but exhausted.
Source: Carvana Shareholder Letter - Q4 2024 - Page 1
The plateauing unit sales clearly get reflected in the revenue numbers. They pretty much track each other.
Source: Carvana Shareholder Letter - Q4 2024 - Page 1
CVNA has a long-term goal of selling 3 million units per year in the next 5 to 10 years. Will it be able to gain further market share and achieve that? Your guess is as good as mine. However, CVNA does have the platform to get there. As I mentioned above, without further unit sales growth, CVNA’s stock price will get derated very quickly.
Credit Risk - Securitizations and VIEs
One would imagine that CVNA securitizing the loans it originates and offloading them removes the credit risk from its books. Nope, it doesn’t fully.
Note
At least 5% of the beneficial interests issued by the securitization trusts need to be held on the issuer’s books to comply with Regulation RR of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Risk Retention Rules").
As of March 31, 2025, CVNA had exposure to $475 million in interest in unconsolidated securitization trusts (Source: Q1 2025 10Q PDF Page 16). This is the total loss that CVNA would incur if the loans go bad under severe conditions; think subprime mortgage like crisis.
The moratorium on student loan payments is over, credit card and BNPL defaults are rising, and subprime loans are increasingly getting delinquent. Well, you must have seen those Klarna BNPL Burrito memes. In any event, I believe we are still in the early days of all of this blowing up, something like early or mid-2007 MBS stress situation.
Keep an eye on this like a hawk if you own CVNA. If CNVA is unable to securitize and offload the loans or current ABSs start blowing up, watch out.
Wait, what? Confused? Well, public shareholders of CVNA have an economic interest in only 62.5% of the underlying operating business. Let that sink in. Most probably, most retail investors don’t know this and would be shocked to hear this. Let me explain.
Here is the organizational structure of CVNA.
Source: 2024 10K Page 8
The public owns shares of Carvana Co., which is a holding company. Carvana Co.’s economic interest is 62.5% in Carvana Group, LLC, which is a VIE. The rest 37.5% of economic interest belongs to those LLC Unitholders (Garcia et. al.) in the top right box.
Consider this from the Q1 2025 10Q PDF Page 8:
Due to Carvana Co.'s power to control and its significant economic interest in Carvana Group, it is considered the primary beneficiary of the VIE and the Company consolidates the financial results of Carvana Group. As of March 31, 2025, Carvana Co. owned approximately 62.5% of Carvana Group and the LLC Unitholders (as defined in Note 10 — Stockholders' Equity) owned the remaining 37.5%.
Now, what that means is that because Carvana Co. has a majority interest in the VIE, it reports the consolidated financials (legally required under GAAP); however, when shareholders look at the EPS, it can be misleading as it doesn’t account for the actual economic interest. Consider this note from the Q1 2025 shareholder letter:
Basic and diluted net earnings per Class A share were $1.61 and $1.51, respectively, based on 134 million and 143 million shares of Class A common stock outstanding, respectively. Assuming full conversion of LLC units and other dilutive effects, there would have been 223 million shares of Class A common stock outstanding.
You thought CVNA was overvalued? I just made it much more overvalued by an order of magnitude. Essentially, whatever your DCF model says CVNA’s intrinsic value is, the actual value attributable to shareholders is 62.5% of that. There is a reason HoldCos trade at a discount, and I explained why earlier this year when PDD was a hot topic of discussion.
So, when will the market realize this and appropriately value CVNA? I don’t know. It took years before the market realized what they were getting into with all the Chinese companies, which have similar structures to CVNA. As I say:
Efficient Market Hypothesis is bunkum. Reflexivity drives markets.
Verdict
Avoid. It is best to stay away from meme stocks. That said, everybody is an adult here; do as you deem correct.
Duolingo
In my article about Duolingo last week, I highlighted their use of edgy social media videos and posts as a risk factor for a company of its size. Guess what happened over the weekend and this week?
Duolingo had recently announced that it was laying off 10% of its workforce and going AI-first. They had even highlighted their AI capabilities, which I laughed at in my article, in their earnings call. That said, the public on TikTok and Instagram were not very happy about the whole thing and started hammering every video and post Duolingo posted. You know it became a PR issue as Duolingo deleted all their posts on TikTok and Instagram. Yes, all of them from whenever they had the accounts. Then radio silence.
However, the following started doing the rounds on social media on the 21st:
Source: Fortune
The guy insulted teachers. Game over. The following sums up the sentiment:
From BlueSky
I am surprised that the street has not caught on. Most probably because most of the people are on X, and I didn’t see much talk about it until I pointed this out to Citron Research yesterday. Whatever the case, the Q2 earnings call will be lit. It is anybody’s guess how many users Duolingo has lost and continues to lose.
It gets better. Duolingo's social media accounts yesterday started pretending to revolt against the company's decision to go AI-first. The new bizarre strategy is not working as people are having none of it and still deriding the company and calling them out as fake, and a lot of other not-so-nice stuff.
I can help them fix this PR disaster. However, since they insulted teachers, I wouldn’t do it for any amount of money. Let them face the heat and suffer the consequences.
Until next time. Have fun!!!
