Shares of Carvana (CVNA.US) experienced significant volatility today after prominent short seller Hindenburg Research published a detailed report alleging widespread accounting manipulation and questionable business practices at the online used-car retailer. The stock initially plunged 11% before recovering to trade slightly higher. Here is a link to the full article.
Key Allegations:
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Open account Try demo Download mobile app Download mobile app- $800 million in undisclosed related-party loan sales through trusts linked to Cerberus Capital
- Aggressive accounting practices and lax loan underwriting standards
- Significant related-party transactions with DriveTime, controlled by CEO's father
- Undisclosed SEC investigation, according to FOIA intelligence firm
Accounting and Loan Concerns
Hindenburg's investigation, which included 49 interviews with industry experts and former employees, claims Carvana has propped up its reported income through questionable accounting practices. The report alleges the company's "originate to sell" loan model is heavily skewed toward subprime borrowers, with almost 44% of loans in non-prime categories.
Valuation Questions
The short seller emphasizes that Carvana trades at significant premiums to peers:
- 845% higher sales multiple vs. competitors CarMax and AutoNation
- 754% premium on forward earnings basis
- $4.8 billion in net debt with junk credit rating
Leadership Scrutiny
The report raises concerns about insider stock sales, noting that Ernest Garcia II, father of Carvana's CEO, has sold $1.4 billion in stock recently. This follows his previous sales of $3.6 billion between 2020-2021, which preceded a 99% stock decline.
Market Impact
Despite the serious allegations, Carvana's stock showed resilience, recovering from initial losses to trade up 2%. The company has yet to respond to requests for comment on the allegations.
The focus now shifts to how Carvana will address these allegations and whether regulatory authorities might take interest in the claims of undisclosed related-party transactions and accounting practices. The company's response could have significant implications for its $44 billion market valuation and investor confidence.
Carvana (D1 Interval)
The stock has retested the 61.8% Fibonacci retracement level and is currently trading above the 100-day SMA. For bulls, the key target is the 50-day SMA, which aligns with the 23.6% Fibonacci retracement level. This level previously acted as strong support for the stock and may now serve as a critical resistance.
Bears, on the other hand, will aim to push the price below the 61.8% Fibonacci retracement level, targeting the 78.6% Fibonacci retracement level and the 200-day SMA at $153.91.
The RSI is attempting to bounce back from bearish divergence, which could signal a potential recovery. However, the MACD continues to diverge lower, indicating ongoing bearish momentum and warranting caution. Source: xStation
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