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Shares of online used car retailer Carvana fell 11% in New York on Wednesday after short seller Gotham City Research questioned the family management group’s arrangements with related parties.
Alongside the important report, Gotham released financial statements showing that its privately held sister company DriveTime Automotive’s business burned through $1 billion in cash from 2023 to 2024, which is consistent with Carvana’s profitability transformation.
Carvana stock began selling Wednesday morning after Gotham telegraphed its findings on social media and released the report just after 11 a.m. in New York. Shares fell as much as 13% in morning trading. Gotham said it legally obtained DriveTime’s financial statements, which are kept confidential.
The attack on the Garcia family-controlled company reignited a debate over the quality of related-party transactions and financial disclosures that had been simmering since short-seller Hindenburg Research challenged Carvana’s accounting last January.
The online dealership, run by Ernie Garcia III, was spun off from the Drivetime chain of used car dealerships owned by his father, Ernie Garcia II, in which he holds a 14 percent stake.
Carvana narrowly avoided bankruptcy in 2022, with its stock hitting a low of $4, but cost-cutting and an agreement with creditors led to a turnaround that saw its stock rise 100 times to $473 this month.
Carvana has historically been in the red, but turned profitable in 2023 and generated $1.4 billion in adjusted earnings before interest, depreciation and amortization in 2024. The company did not respond to requests for comment.
Carvana and DriveTime use a third Garcia-controlled company called Bridgecrest, which manages the loans they offer to customers. These will be packaged and sold to financial investors, according to DriveTime’s disclosure.
Gotham highlighted in its report that DriveTime financed cash outflows from its operations through a bond issue in 2024, increasing $800 million to $4.3 billion during 2024.
DriveTime’s use of debt to fund these outflows also comes at a time when problems at parts suppliers First Brands and Tricolor have brought increased attention to the strength of U.S. consumer credit and the auto industry’s underappreciated financial risks.
Hindenburg, which has since disbanded, attacked the group last year in a report alleging that Carvana made a “sham” deal with DriveTime and calling Carvana’s restructuring a “mirage.”
Carvana rejected the report at the time, saying the company was “one of the most thoroughly investigated public companies” and that Hindenburg’s claims were “intentionally misleading and inaccurate, and have already been made numerous times by other short sellers seeking to profit from the decline in our stock price.”