Carvana stock saw a significant dip on Thursday after short-selling firm Hindenburg Research disclosed that it had taken a short position against the online used-car retailer. This move immediately caught the attention of investors, especially considering how well Carvana stock had performed in 2024. Over the course of the year, Carvana stock nearly quadrupled in value, driven by a surge in demand for used cars—a notable recovery after the company had faced serious bankruptcy concerns in previous years.
However, Hindenburg Research has raised doubts about the sustainability of this growth. The firm claims that Carvana’s recent rise is a “mirage,” arguing that the company’s success is built on shaky foundations. In a detailed report, Hindenburg accused Carvana of selling off its customer auto loans to third parties, focusing particularly on the high-risk subprime and deep subprime lending markets. According to Hindenburg, the company sold $800 million in loans to a “related third party.” Furthermore, Hindenburg alleged that nearly 26% of Carvana’s gross profit over the past nine months came from such loan sales.
These claims put Carvana stock under a new spotlight, causing many to question whether the company’s business model is as robust as it appears. The accusations highlight the risk associated with Carvana’s strategy of relying on risky loan sales to fuel its growth. If the loans are tied to subprime borrowers, Carvana could face substantial losses if these borrowers default, which would directly impact the company’s profitability.
Carvana’s Strong Response
Carvana was quick to push back against Hindenburg’s report. In a statement, the company dismissed the allegations as misleading and unfounded, asserting that similar claims had been made by other short-sellers in the past—none of which had proved accurate. Carvana remained confident in its business plan, stating that it would continue to focus on executing its strategy for 2025. The company’s leadership emphasized that its growth over the past year was not a result of questionable practices but rather due to the strong performance of its business model, which has resonated with consumers.
Indeed, Carvana has been able to carve out a niche in the booming used-car market, with its online platform allowing customers to shop for cars and have them delivered directly to their homes. This unique model, combined with rising demand for used cars driven by high prices for new vehicles and higher interest rates, has made Carvana an attractive option for consumers. In fact, the company’s third-quarter earnings in October nearly tripled analysts’ expectations, and Carvana raised its full-year outlook as a result.
Despite the concerns raised by Hindenburg, analysts remain mostly bullish on Carvana stock. According to consensus estimates, the stock still holds a potential upside of around 28% compared to its recent closing price of just under $200. Analysts have pointed to Carvana’s market position, customer-centric approach, and strong recent earnings as key reasons to remain optimistic about the company’s future.
The Insider Selling Controversy
While the report from Hindenburg has drawn attention to Carvana’s financial practices, the short-seller also highlighted the large stock sales made by Carvana insiders, particularly CEO Ernie Garcia III and his father, Ernest Garcia II. Hindenburg’s report pointed out that Ernest Garcia II sold $3.6 billion in Carvana stock between August 2020 and August 2021, just before the company’s stock price hit a low point during 2022 and 2023. The timing of these sales raised eyebrows, as it appeared that the Garcias were cashing out at an opportune moment before the stock’s value plummeted.
Adding fuel to the fire, Hindenburg noted that Ernest Garcia II continued to sell additional stock worth $1.4 billion over the past year, during Carvana’s recovery. This raised questions about the Garcias’ confidence in the company’s future. If the insiders were truly optimistic about Carvana’s prospects, some argue, they would be less likely to sell such large amounts of stock. Instead, the stock sales have raised concerns about insider trading and whether those closest to the company may be cashing out while the stock price remains high.
Is Carvana Stock Worth the Risk?
Despite the growing scrutiny surrounding Carvana stock, it’s important to consider the company’s impressive recovery over the past year. Carvana has managed to successfully capitalize on the rising demand for used cars, and its digital platform has proven to be a major draw for consumers who prefer a more convenient way to buy cars. Even with the risk factors that have been highlighted by Hindenburg, such as subprime lending and insider stock sales, the company still has the potential for significant growth, especially if the used-car market continues to perform well.
That being said, the concerns raised by Hindenburg are not easily dismissed. The reliance on subprime lending to fuel Carvana’s profits could be a double-edged sword, especially if the market for used cars begins to slow down or if economic conditions change. As the cost of borrowing increases and consumer spending tightens, Carvana may find itself in a vulnerable position. The large-scale stock sales by Carvana insiders further suggest that there could be a disconnect between the company’s outward optimism and the confidence of its leadership team.
What’s Next for Carvana Stock?
As Carvana looks ahead to 2025, it faces a crucial period. The company will need to continue proving that its growth is sustainable and that its business model is built on solid ground. For now, analysts remain mostly positive, but the risks are significant. If Carvana can weather the storm and continue to capitalize on the used-car market, it could be positioned for long-term success. However, if the company’s reliance on risky lending practices and insider stock sales begins to catch up with it, Carvana stock may face another round of volatility.
In the coming months, investors will be watching closely to see how Carvana responds to the challenges posed by Hindenburg’s report and whether the company can keep up its momentum in the competitive used-car market. For now, Carvana’s future remains uncertain, and its stock will continue to be a focal point for both analysts and investors alike.
