$CVNA (-9.7%)
"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 warranties. Another key issue appears to be a broader concern around industry auto loan defaults and delinquencies.
The report rests on four key points:
1) Solvency risk and potential business disruption from a pullback in loan purchases by ALLY (covered by JPM analyst Richard Shane) due to deteriorating auto credit performance.
2) An alleged lax credit underwriting model, related party loan servicing, and an elevated mix of loan extensions supposedly cushioning the bottom line.
3) Risks from related party transactions involving warranty sales commissions, inventory off-loading, and loan sales.
4) Alleged window-dressing in cost allocation across GP and SG&A, as well as concerns about degrading vehicle reconditioning standards and potential undisclosed SEC investigations.
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.
Concerns around broader auto industry defaults and losses are legitimate, but not new, with the rate of change improving as the industry moves past problematic originations from 2021/2022, inflation stabilizes, used car prices level off, and unemployment remains steady.
Ultimately, we encourage investors to focus on EBITDA/unit and FCF rather than non-GAAP GPU/SG&A metrics, and we do not view CVNA’s reported economics as inflated. This report addresses unit economics, lending, and warranty revenue, along with relevant data and charts."
