In today’s Finshots, we break down Hindenburg’s latest report against Carvana, an American company known as the “Amazon of cars”.

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The Story

Hindenburg Research is back with another scathing report. This time, it’s Carvana, the American e-commerce darling for used cars, in the crosshairs. While it hasn’t caused an uproar like the Adani saga in India, this takedown is equally juicy.

So, let’s take it from the top.

First, a brief overview of Carvana.

Carvana burst onto the scene in 2012, revolutionising how people buy and sell used cars. No haggling with salespeople, no visits to the dealership—just a few clicks online, and boom, you can seal the deal. And it’s not some random, fragmented operation. It runs at scale, covering over 81% of the US population—or, as Forbes calls it, “the Amazon of cars.”

By 2017, Carvana went public on the NYSE, riding high on its promise to shake up the auto world. But its real moment came during the pandemic. With supply chain hiccups stalling new car production, Americans swarmed the used car market. And Carvana thrived. Not just by selling cars but financing them too, fueled by ultra-low interest rates. By early 2021, its stock price struck gold, hitting a jaw-dropping $370 – over 20x leap from its IPO days!

But every boom often has its busts. And just like that, the good times for the company came to a screeching halt.

By late 2021, the pandemic's effects began to fade. People returned to normal lives, supply chains slowly resumed their normal operations, and the demand for used cars gradually cooled off.

Carvana, however, had overplayed its hand by then. During the boom, it made bold moves like buying ADESA, a physical car auction business, for $2.2 billion. The idea was to integrate it vertically, but this was a costly misstep. In addition, it bought thousands of vehicles from auctions and consumers at hefty premiums. 

And what came next? Well, debt piled up, including the debt-funded ADESA acquisition deal, and Carvana’s stock became the most shorted in the country.

Then came the hike in interest rates, making car financing much more expensive for buyers. Add to this Carvana’s operational inefficiencies, and the wheels started to come off.

By 2022, the stock had collapsed to just $5, and bankruptcy seemed inevitable.

But Carvana wasn’t ready to throw in the towel just yet.

So, in 2023, it launched a rather aggressive turnaround plan. First, it slashed costs through layoffs, scaled back its cash-gobbling marketing, renegotiated debt with creditors, and shifted its focus to profitability instead of chasing volumes. By early 2024, it posted its first profit in two years, and its stock clawed back to $55. It wasn’t back to its glory days, but it was no longer on the brink.

Fast forward to a few days ago, Carvana’s shares skyrocketed to $268. It seemed like the company had turned the corner.

Enter Hindenburg, the research company that released a report on the company last week, alleging that Carvana’s interior might not be as polished as its current exterior. It claims Carvana is more of a house of cards, built on questionable accounting practices, risky loans, and some eyebrow-raising insider dealings.

So, let’s break down these allegations in simpler terms.

First up, Carvana’s financial statements and accounting practices. 

You see, listed companies need to report their finances honestly. It’s how investors and regulators gauge their health. But Hindenburg accuses Carvana of bending accounting rules to look healthier than it is, delaying losses, and playing around with income. For instance, it claims the company delays recording losses and shifts income to different reporting periods. It’s like ignoring mounting bills at home and pretending everything’s fine—until it’s not. It might make your finances look great for now, but eventually, they catch up with you. And that’s exactly what Hindenburg says Carvana is doing on a corporate scale.

Then there’s the loan business. As you already know, Carvana doesn’t just sell used cars but also helps customers finance them through loans. But as per Hindenburg, these loans often come with flimsy underwriting standards. This means that many of these car buyers might not have the means to repay their loans. The report says that nearly half of these loans are ‘underwater’, which simply means that the car’s value is lower than the loan balance. Carvana then bundles these risky loans and sells them to investors as securities. This all looks like a profitable move on paper, whereas in reality, it’s far from being legit.

Now, let’s talk about family ties. Carvana’s CEO’s father owns another car rental company called DriveTime. And Hindenburg points out that Carvana has been selling cars and loans to DriveTime. But it’s unclear whether these transactions are done at fair market value or if they’re just a way to shuffle money between family businesses to simply patch up Carvana’s books. And speaking of millions, insiders, including the CEO’s father, have reportedly sold over $4 billion worth of Carvana shares, often cashing out when the stock temporarily spiked.

So, what does all of this tell us?

See, Carvana experienced two massive growth phases, during which its stock prices were through the roof. During both times, the company had a golden chance to fix its finances by raising big money. 

What did it do instead? 

During the first big rally, the leadership only raised a small amount of money for Carvana. Meanwhile, the CEO’s father sold a staggering $3.6 billion worth of his own stock.

And as Carvana's numbers started to sink, they reportedly fiddled with their accounting, making the numbers look even worse than they already were. Just so they could renegotiate their debts. They pushed off paying cash interest and even cut down the amount they owed, leaving lenders to absorb the hit. Clever, eh?

So yeah, instead of raising significant capital to steady the ship, they left investors holding the bag.

Then came another rally. You’d think this time, they would raise some significant capital and stabilise the business. But once again, they raised just enough money to scrape by. And guess what? The CEO’s father cashed out again, pocketing another $1.4 billion, leaving all the burden on the investors. 

In all, Hindenburg’s report paints Carvana as a house of cards, prioritising insider profits over stability. The promoters, as per the report, pocketed billions while creditors and investors were left in the dust.

So that was the long and short of it.

It’s a story of ambition, greed, and a high-stakes gamble gone wrong. Carvana might have been the Amazon of cars, but if Hindenburg is right, it’s now a cautionary tale.

Until next time…

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