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The prolific short-seller Hindenburg Research has begun 2025 with a bang by publishing a scathing report against Carvana (CVNA), a platform for buying and selling used cars. Interestingly, even as Carvana’s stock continues to get hammered, the company has managed to receive qualified aid from an unexpected quarter – the Wall Street titan JP Morgan.
NEW FROM US:
Carvana—A Father-Son Accounting Grift For The Ageshttps://t.co/Ew1dAPCCmf $CVNA
(1/x)
— Hindenburg Research (@HindenburgRes) January 2, 2025
For the benefit of those who might not be aware, Hindenburg Research has raised several red flags in relation to Carvana’s business model in a report titled “Carvana—A Father-Son Accounting Grift For The Ages.” Among other things, the report alleges:
- Carvana is grossly overvalued: at a time when used vehicle prices have declined by ~20 percent over the past 3 years and subprime auto loan delinquencies have exceeded the zenith seen during the GFC of 2008, the company is “trading at an 845% higher sales multiple relative to online car peers CarMax & AutoNation, and a 754% forward earnings premium.”
- Carvana earns substantial income by selling repackaged car loans, with Ally Financial acting as a major conduit for the company to offload these loans. However, loan sales to Ally have scaled down in recent quarters as the loan purchase commitments agreed upon between the two end in January 2025.
- Hindenburg Research has identified a new buyer of Carvana’s repackaged loans: “a trust affiliated with Cerberus Capital, where Carvana Director Dan Quayle is a member of its “senior leadership team” & Chairman of Global Investments, indicating the new buyer is an undisclosed related-party, contrary to $CVNA’s claims.”
- “Carvana’s “originate to sell” model is highly skewed to packaging non-prime and subprime borrower loans.”
- Hindenburg Research believes Carvana’s toxic loan book is a direct result of its lax underwriting standards, with internal testimonies hinting at a 100 percent approval rate.
- “Carvana has propped up its numbers through a grab bag of related-party accounting games.” For instance, the company has been able to offer borrower extensions by reportedly leveraging an insider connection with its loan servicer, which itself is an affiliate of a private car dealership run by the father of Carvana’s CEO.
- “In 2023, $145 million of “other revenue” or ~8.4% of gross profit came from related parties.”
- Finally, Hindenburg Research has pointed out that Carvana remains subject to an undisclosed investigation by the SEC, as per the findings by Disclosure Insight.
JPMORGAN ON HINDENBURG’S $CVNA (OW; PT $300) REPORT:
“We believe the major Carvana-specific fundamental concern highlighted in Hindenburg Research’s report is the unrealistic GPU, particularly Other GPU and related practices around related party transactions for loan sales and…
— Wall St Engine (@wallstengine) January 3, 2025
This brings us to the crux of the matter. Now, JP Morgan has penned a dedicated investment note on the topic, continuing to maintain an ‘Overweight’ rating on Carvana shares.
While conceding the need for additional disclosures, JP Morgan declares that its own investigation of Carvana in 2019 and 2022 did not raise red flags:
“Our own analysis (see deep dives from Feb 2022 and Oct 2019) has not flagged red flags, particularly regarding gain on sale accounting and the underlying FCF generated by the business. However, we believe CVNA could benefit from providing more disclosure around gain on sale economics at partners and related FCF dynamics.”
Elsewhere, JP Morgan notes that “concerns around broader auto industry defaults and losses are legitimate, but not new,” going on to point out that the industry’s rate of change continues to improve as it “moves past problematic originations from 2021/2022, inflation stabilizes, used car prices level off, and unemployment remains steady.”
In what is a solid endorsement of Carvana, JP Morgan notes:
“We do not view CVNA’s reported economics as inflated.”
In light of this take, JP Morgan continues to maintain a $300 stock price target on Carvana shares. In doing so, the Wall Street titan is taking one of the most prolific short-sellers head-on, one that has been responsible for bringing down a sizable notch India’s Adani Group, Twitter ( in Elon Musk’s buyout phase), and Nikola Motors.
