About the Grift
If you think Carvana (CVNA) is in the business of selling used cars, you’re wrong.
Well, not wrong per se, because the core operation of the company has little to do with selling automobiles. The true source of revenue comes from loan origination when potential buyers need financing options to afford a car.
Remember that whole debacle during the global financial crisis when banks were underwriting insane loans and then passing them off in aggregate as mortgage-backed securities and then recombined into toxic collateralized debt obligations that eventually exploded in our collective shocked Pikachu faces?
Well what Carvana is doing is nothing like that. Instead, the grift …
About the Grift
If you think Carvana (CVNA) is in the business of selling used cars, you’re wrong.
Well, not wrong per se, because the core operation of the company has little to do with selling automobiles. The true source of revenue comes from loan origination when potential buyers need financing options to afford a car.
Remember that whole debacle during the global financial crisis when banks were underwriting insane loans and then passing them off in aggregate as mortgage-backed securities and then recombined into toxic collateralized debt obligations that eventually exploded in our collective shocked Pikachu faces?
Well what Carvana is doing is nothing like that. Instead, the grift starts and ends with that The Big Short scene where Steve Carell’s character is talking to the NINJA loan guys - the ones who would write a loan on no income, no job, and could sell it to a bank by breakfast the next day.
In January this year Hindenburg Research published an analysis of Carvana, uncovering what they believe is a fairly straightforward scheme to commit fraud against investors.
The abbreviated version of the grift works like this.
- Ernest Garcia II is a major Carvana shareholder - he is the father of Carvana CEO Ernie Garcia III. He also runs a company called DriveTime, a private car dealership.
- Carvana sells many used vehicles and offers financing, creating subprime auto loans that have little hope of avoiding default.
- Carvana sells these loans to DriveTime, earning the sale of the car and the loan as revenue. The risk of those low-quality loans is no longer on Carvana’s books. If they default, that’s DriveTime’s problem.
- Carvana also originates extended warranties, and sells them to DriveTime on favorable terms to Carvana.
- Carvana also avoids marking down unsold inventory. How? By selling it to DriveTime.
- CVNA goes up. Way up. Virtually up 10,000% since 2023.
- Ernest Garcia II sells large quantities of CVNA shares, the value of which far exceeds the loss on failing loans owned by DriveTime.
By all means, Hindenburg Research goes into exquisite detail in their research; read the report for a full explanation.
Ask Why, Asshole
On April 17, 2001, recently promoted Enron CEO Jeffrey Skilling infamously called financial analyst Richard Grubman an asshole during an investor conference call.
Grubman: You’re the only financial institution that can’t come up with a balance sheet or cash flow statement after earnings.
And this was for good reason. Enron CFO Andy Fastow had been hard at work creating Special Purpose Vehicles (SPVs) to manipulate Enron’s financial statements, ultimately concealing its considerable debt obligations. This, in turn, would inflate the company’s reported earnings, creating a false sense of financial health, and boosting the stock price.
In fact, Enron’s board of directors waived the company’s Code of Conduct to allow Fastow to serve as managing partner of these private equity funds, while simultaneously serving as Enron’s CFO, despite being in a clear conflict of interest. It was necessary to broker self-deals that financially made no sense.
Kind of like how the Carvana CEO is self dealing with his father’s private company. One can’t help but draw parallels between the Enron scheme and Carvana’s relationship with DriveTime. Hiding debt in a private entity to offload it from your own balance sheet works great, until it doesn’t.
Automatic Buying
The scheme has been a success.
So successful, in fact, that Carvana will be included in the S&P 500 starting on December 22nd, 2025. And that should not sit well with anyone.
The main criteria for S&P inclusion include:
- Market capitalization of at least approximately $23 billion
- U.S. based company listed on major exchange
- Highly liquid, with a minimum trading volume of 250k shares
- Positive sum of GAAP earnings for the past 4 quarters combined
Carvana meets these criteria, but seems to be doing so using inflated numbers. It’s one thing for shady business practices to go unchecked for a single company, where investors voluntarily opt into the grift. But by being included in the S&P 500, the stock will be further driven upward by the automatic share purchases done by hundreds of pensions and hedge funds that track the S&P index.
Saving money in a 401(k)? Congratulations, you’re buying into a used car dealer propping up its numbers by offloading risky debt into a black hole.
Meanwhile, expect the Garcia family to continue to sell, sell, and sell.
What Happens Now?
The S&P 500 is not obligated to include any company that meets the quantitative criteria. The index selection committee could put a stop to Carvana at any time.
In an ideal world, the situation would at least be under investigation, if not leading into a criminal trial. Or maybe a judge could issue an injunction preventing the S&P from including this company in the index. Perhaps, God forbid, Congress does something, literally anything. Or maybe even just offering some kind of recognition that what is happening isn’t right.
Or not.
Eventually DriveTime will implode. Or explode. Or simply cease to exist. When it does, Carvana loses its dumping ground for subprime loans, inflated warranties, and stagnant inventory. The revenue stream will evaporate, leaving the company no path forward. And at the end of the day, who is left holding the bag? You, obviously.