In 2024, Carvana experienced a remarkable turnaround, with its stock soaring by an incredible 284%, taking the market by surprise. The online used-car retailer, once teetering on the brink of bankruptcy, seemed to have reversed its fortunes, reaching a staggering valuation of over $50 billion.
Despite these gains, not everyone is convinced of the sustainability of Carvana’s recovery.
Hindenburg Research, a prominent short-selling firm known for its critical and often bearish assessments of companies, recently disclosed a new short position against Carvana, challenging the authenticity of its comeback. In a report titled “Carvana: A Father-Son Accounting Grift For The Ages,” Hindenburg has labeled the company’s recent success as nothing more than a “mirage,” propped up by what it alleges are unstable loans and questionable accounting practices.
In this article, we’ll dive deeper into Hindenburg’s allegations and assess whether investors should consider steering clear of Carvana’s stock. Is Carvana’s incredible stock surge a sign of long-term success, or is it time for investors to heed the warnings and jump ship? Let’s find out.
About Carvana Stock
With a market capitalization of $40.9 billion, Carvana is an online car dealer. Its main business is an online platform that enables customers to research and select a vehicle, inspect it using the company’s 360-degree imaging technology, secure financing and warranty coverage, complete the purchase, and arrange delivery or pickup - all from their desktop or mobile devices. The company also operates auction platforms.
Shares of CVNA have experienced a remarkable surge over the past few years, as the company transitioned from the brink of bankruptcy to a valuation exceeding $50 billion. CVNA stock soared 284% in 2024 due to the rising demand for used cars.
Hindenburg Research Issues Short Report on Carvana
On Jan. 2, shares of Carvana dropped almost 2% following the release of a negative report by Hindenburg Research, which also revealed that it had taken a short position in the company. In the next trading session, the stock further declined by 11%.
The report titled “Carvana: A Father-Son Accounting Grift For The Ages” claimed that the online used-car retailer’s recent turnaround is a “mirage,” supported by unstable loans and manipulative accounting practices. The firm alleged that Carvana has been selling its customer auto loans to third parties “largely in the risky subprime and deep subprime space.” Hindenburg claims to have discovered $800 million in loan sales to an unidentified “related third party,” stating that about 26% of the company’s gross profit in the past nine months stemmed from these transactions.
Hindenburg further alleges that an increase in borrower extensions at Carvana has been facilitated by the company’s loan servicer, DriveTime, a private car dealership affiliate run by key shareholder Ernest Garcia II. “The company seems to be avoiding reporting higher delinquencies by granting loan extensions instead,” according to Hindenburg.
In addition, Hindenburg criticized Carvana insiders, specifically pointing to CEO Ernie Garcia III’s father, Garcia II, who is Carvana’s largest shareholder, for selling significant portions of company stock. Hindenburg noted that the elder Garcia sold $3.6 billion worth of stock from August 2020 to August 2021, before the stock hit its low in 2022 and 2023, and offloaded another $1.4 billion over the past year as the stock began to recover.
Hindenburg said that even before accounting for the findings of its investigation, Carvana’s valuation is exceedingly high, with the stock trading at a sales multiple 845% higher than online car peers CarMax and AutoNation , and at a 754% premium on a forward earnings basis. Additionally, it’s worth noting that the company is burdened with approximately $4.8 billion in net debt and is junk-rated by ratings agencies.
Meanwhile, Carvana contested the findings. “The arguments in today’s report are intentionally misleading and have already been made numerous times by other short sellers seeking to benefit from a decline in our stock price,” a Carvana spokesperson said in an emailed statement. “We plan to stay focused on executing our plan for another great year in 2025.”
Wall Street Analysts Defend Carvana After Hindenburg’s Report
Some Wall Street analysts have stepped forward to defend the company following Hindenburg’s short-seller report.
J.P. Morgan’s Rajat Gupta stated that although there is potential for improvement at the online used car retailer, his research “has not suggested any red flags.” Gupta dismissed many of the concerns raised in the Hindenburg report, citing many were “known unknowns that investors have been cognizant of, and have absorbed over the last several years.” The firm kept its “Overweight” rating on the stock.
BTIG’s Marvin Fong found some of Hindenburg’s arguments “unconvincing,” including the claim that declining used car prices would put pressure on the company’s gross margin. “We believe the better indicator of gross profit behavior is the spread of retail prices to wholesale prices,” he said. Fong also addressed other arguments from Hindenburg, including Carvana’s relationship with Ally Financial , the sale of $800 million in receivables to an “unnamed party,” and prime delinquencies. He noted that these points either contain flawed information or are misinterpreted as negative; instead, they could be viewed positively for Carvana under more discerning examination.
Wedbush analysts noted that after reviewing Hindenburg Research’s short report on Carvana and speaking with the company, they found no “smoking guns.” The firm described many of Hindenburg’s allegations, including those regarding the company's financing business and related party transactions, as “exaggerated” or “old news.”
Needham stated that Hindenburg’s short report, which casts doubt on Carvana’s ability to grow unit sales amid declining interest in auto loans due to partner concerns and deteriorating loan performance, is “misplaced.”
Recent News for CVNA Stock
On Jan. 7, shares of Carvana gained over 5% after RBC Capital analyst Brad Erickson upgraded the company to “Outperform” from “Sector Perform” with a price target of $280. “After Carvana’s remarkable turnaround last year, we see the controversial pullback as an opportunity,” the analyst said in a research note.
On Jan. 6, CVNA stock rose more than 6% after the company confirmed in an SEC filing that it had reestablished an agreement with Ally Financial to sell up to $4 billion in used-vehicle loan receivables to the lender. An amendment to the master purchase and sales agreement reinstates the loan purchases from Jan. 3, 2025, to Jan. 2, 2026.
The arrangement is crucial as Ally Financial has purchased receivables sufficient to finance 50% of the company’s new loan originations. The transaction is anticipated to deliver a significant capital boost to CVNA through the sale of its finance receivables.
Notably, the Hindenburg Research report cautioned that the company’s growth would be unsustainable if lenders stopped purchasing its loan receivables.
How Did CVNA Perform in Q3?
On Oct. 31, CVNA stock jumped over 19% after the company reported “industry-leading” Q3 results. The post-earnings surge was primarily fueled by Carvana’s increasing unit sales as well as rising gross profit per unit (GPU), which is a key indicator of the company’s profitability. The company sold 108,651 vehicles in Q3, up 34% year-over-year, boosting total revenue by 32% year-over-year to $3.655 billion. The top line beat estimates by $184.76 million. Its non-GAAP GPU increased by 20% year-over-year to $7,685.
Meanwhile, Carvana’s third-quarter GPU of $7,685 is broken down as follows: $3,617 from retail vehicle sales (a 26% year-over-year increase), $571 from wholesale vehicle sales (a 53% year-over-year increase), $552 from wholesale marketplace sales (a 5% year-over-year decline), and $2,945 from other gross profit (a 15% year-over-year increase). Notably, this other gross profit stems from loan originations and their sales to third parties such as Ally. Although it constitutes a solid portion of Carvana’s GPU, it’s clear that the company’s primary GPU growth was driven by its core operation - selling retail vehicles. The growth in “core” GPU was fueled by the company’s expansion in reconditioning facilities and larger wholesale-retail spreads, alleviating investor concerns about loan origination.
Carvana also reached new profitability milestones. CVNA’s adjusted EBITDA hit a record $429 million. Its adjusted EBITDA margin reached a record high of 11.7% among public automotive retailers, more than doubling from a year ago and surpassing expectations. Additionally, the company posted GAAP EPS of $0.64, beating Wall Street’s estimates by $0.42.
“Carvana’s exceptional results underscore our position as the fastest-growing and most profitable automotive retailer,” said Ernie Garcia III, Carvana founder and CEO, noting that the company’s Q3 progress “further highlights the strength of our vertically integrated business model and also begins to demonstrate the power of our unique infrastructure, including the ADESA network.”
Looking ahead, the company anticipates Q4 vehicle sales to exceed the 34% year-over-year growth rate seen in Q3, with FY24 adjusted EBITDA projected to be “significantly” above the previously stated range of $1.0 billion to $1.2 billion.
CVNA Valuation and Analysts’ Estimates
According to Wall Street estimates, CVNA is expected to report GAAP EPS of $0.88 in FY24. Also, analysts anticipate the company’s top line to grow 24.81% year-over-year to $13.44 billion.
In terms of valuation, the stock appears quite expensive, even after a recent pullback. On a forward GAAP P/E basis, CVNA has a P/E ratio of 167.37x, which is a 775.88% premium over the sector median of 19.11x. However, as previously noted, Carvana is projected to achieve a 24.81% year-over-year revenue growth in FY24, and analysts forecast a 17.27% year-over-year revenue increase for FY25. For comparison, fellow automotive retailer Penske Automotive Group is projected to experience revenue growth of 3.02% in FY24 and 3.53% in FY25. With that, Carvana’s projected revenue growth rates surpass those of Penske Automotive Group by 721.5% in FY24 and 389.2% in FY25. For me, this argument partially explains why the company commands such a high valuation.
Options Market Sentiment on Carvana Stock
Looking at the option chain for January 17, 2025, the $197.50 CALL option has a bid/ask spread of $8.15/$8.65 at the time of writing, while the $197.50 PUT option displays a spread of $7.90/$8.45. Keep in mind that this option strike is closest to the current stock price. We can now determine the expected price fluctuation by utilizing the midpoint prices of these options:
8.18 (197.50 put) + 8.40 (197.50 call) = 16.58/197.00 = 8.4%
Based on current prices, the options market indicates that CVNA stock could experience a movement of about 8% by next week’s options expiration from the $197.50 strike price when applying the long straddle strategy. That would place the stock in a trading range of $180.2 to $213.7.
Notably, call options at the $197.50 strike price outnumber put options by just 1.4 to 1, with 193 open calls compared to 139 open puts, indicating neutral sentiment. However, at the next strike price of $200.00, there are 2.4 times as many open calls as open puts, suggesting that the stock may break out at that round number level.
What Do Analysts Expect for CVNA Stock?
Analysts maintain a positive outlook on CVNA stock, as evidenced by their consensus “Moderate Buy” rating. Out of the 19 analysts providing recommendations for the stock, seven rate it as a “Strong Buy,” two as a “Moderate Buy,” and 10 assign a “Hold” rating. The mean target price for CVNA stock is $262.62, indicating upside potential of about 33.3% from current levels.
The Bottom Line on CVNA Stock
Putting it all together, Carvana’s impressive financial results clearly demonstrate that the company is moving in the right direction. Its organic growth is solid, driven by robust vehicle sales. Moreover, the company’s expected top-line growth rates substantially exceed those of its peers, which partially justifies its premium valuation. Lastly, indications from the options market suggest there may be some short-term upside potential for the stock.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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