Carvana, the online used car retailer, has experienced a meteoric rise in its stock price in recent years, but this success has been accompanied by persistent scrutiny and controversy. Hindenburg Research, a renowned short-selling firm, recently published a report alleging that Carvana’s apparent turnaround is illusory, accusing the company’s leadership, the father-son duo of Ernest Garcia II and Ernest Garcia III, of orchestrating an elaborate accounting scheme. This report, while not entirely unexpected given past criticisms of Carvana, introduces a new element: the alleged involvement of Cerberus Capital Management, a prominent private equity firm.
Hindenburg’s central claim revolves around the sale of $800 million in auto loan receivables by Carvana. These sales, which occurred in the latter half of 2024, were presented in SEC filings as transactions with an “unrelated third party.” However, Hindenburg alleges that the actual buyer was Towd Point Auto Trust, an entity purportedly controlled by Cerberus. This connection is further highlighted by the presence of Dan Quayle, former U.S. Vice President and a senior executive at Cerberus, on Carvana’s board of directors. Hindenburg argues that this relationship necessitates greater transparency, contending that the transactions should be disclosed as related-party dealings. Carvana has denied this assertion, maintaining that the buyer is unrelated, but has refused to reveal the buyer’s identity.
The implications of this alleged connection extend beyond mere financial reporting. Hindenburg’s report draws attention to the political influence of Stephen Feinberg, the founder and controlling shareholder of Cerberus, who has held significant roles within the Trump administration. This adds another layer of complexity to Carvana’s ongoing challenges, which include an SEC investigation initiated in 2020. The company’s history is marked by controversy, notably involving Garcia II’s prior legal issues related to the Lincoln Savings & Loan collapse. Furthermore, Carvana has faced numerous lawsuits alleging various wrongdoings, including illegal licensing practices, misleading financial disclosures, and unfair stock sales. While Carvana denies these allegations, the repeated legal challenges contribute to the overall perception of the company.
While the legality of the transactions with Cerberus remains debatable, with some experts suggesting that they may not technically qualify as related-party dealings, the core issue for investors lies in what these dealings reveal about Carvana’s underlying business model. The company’s profitability hinges on its ability to sell the auto loans it originates, many of which are categorized as subprime. Historically, Ally Financial has been Carvana’s primary loan purchaser, but Ally’s acquisitions have significantly decreased in 2024, likely due to growing concerns about credit risks within the auto loan market. This declining demand from a key partner raises questions about Carvana’s ability to continue securitizing and selling its loan portfolio at favorable rates, a critical component of its financial performance.
The current state of the auto loan market further exacerbates Carvana’s challenges. A substantial portion of car loans issued since 2022 are underwater, meaning the borrower owes more than the car is worth. This, combined with data indicating a high rate of loan extensions for Carvana’s subprime borrowers, paints a concerning picture of the company’s loan portfolio quality. Hindenburg’s report draws parallels between Carvana’s lending practices and the lax underwriting standards that contributed to the 2008 financial crisis, suggesting that the company’s aggressive pursuit of growth may have exposed it to significant risks.
The accusations leveled by Hindenburg, coupled with Carvana’s historical controversies and the challenging economic environment, cast a shadow over the company’s future prospects. While Carvana maintains its innocence and insists on its strong performance, the mounting evidence suggests potential vulnerabilities in its business model. The decline in Ally Financial’s purchases, the rise in underwater auto loans, and the high rate of loan extensions within Carvana’s portfolio all point to potential difficulties in managing its loan book. This, in turn, could impact the company’s ability to generate revenue and maintain its rapid growth trajectory.
Furthermore, the alleged involvement of Cerberus, regardless of its legal classification as a related-party transaction or not, raises concerns about transparency and corporate governance. The refusal to disclose the identity of the loan buyer, coupled with the connection to a prominent private equity firm and a former Vice President, adds to the perception of secrecy and potential conflicts of interest. This lack of transparency can erode investor confidence and further fuel skepticism about Carvana’s financial reporting. The ongoing SEC investigation, while not directly related to the Cerberus dealings, further underscores the regulatory scrutiny surrounding the company and its operations. Investors will be closely watching the outcome of these investigations and legal battles, as they could have a significant impact on Carvana’s long-term viability.
