Shares of Carvana (CVNA.US) saw significant volatility today after prominent short seller Hindenburg Research released a detailed report alleging widespread accounting manipulation and questionable business practices at the used car retailer online. The stock initially plunged 11% before recovering and trading slightly higher.
Main allegations:
- $800 million in undisclosed related party loan sales through trusts linked to Cerberus Capital
- Aggressive accounting practices and lax loan underwriting standards
- Significant transactions with DriveTime, controlled by the CEO’s father.
- SEC investigation undisclosed, intelligence firm says FOIA
Accounting and loan issues
Hindenburg’s investigation, which includes 49 interviews with industry experts and former employees, claims that Carvana inflated its reported revenue through questionable accounting practices. The report alleges that the company’s originate-to-sell lending model is heavily biased toward subprime borrowers, with nearly 44% of loans in non-prime categories.
Assessment Questions
The short seller points out that Carvana trades at significant premiums to its peers:
- 845% higher sales multiple than competitors CarMax and AutoNation
- 754% bonus based on future profits
- Net debt of $4.8 billion and junk credit rating
Management review
The report raises concerns about stock sales by insiders, noting that Ernest Garcia II, the father of Carvana’s CEO, recently sold $1.4 billion worth of stock. This follows its previous sales of $3.6 billion between 2020 and 2021, which preceded a 99% decline in shares.
Market impact
-Despite the serious allegations, Carvana’s stock showed resilience, recovering from initial losses to trade up 2%. The company has not yet responded to requests for comment on the allegations.
Attention now shifts to how Carvana will respond to these allegations and whether regulators might take an interest in allegations of undisclosed related party transactions and accounting practices. The company’s response could have significant consequences for its $44 billion market valuation and investor confidence.
Carvana (Intervalle D1)
The stock 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 moving average, which aligns with the 23.6% Fibonacci retracement level. This level, which previously provided very strong support for the stock, could now serve as critical resistance.
Bears, on the other hand, will look to push price below the 61.8% Fibonacci retracement level, aiming for the 78.6% Fibonacci retracement level and the 200-day SMA at $153.91 .
The RSI is attempting to rebound from a bearish divergence, which could signal a potential recovery. However, the MACD continues to diverge lower, indicating continued bearish momentum and warranting caution. Source: xStation
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