Carvana Co. (NYSE: CVNA) recently faced a substantial downturn in its stock valuation after the influential short-selling entity, Gotham City Research, released a highly critical analysis. The report casts a shadow over Carvana’s financial disclosures, alleging significant overstatements in earnings exceeding $1 billion for the 2023–2024 period. Furthermore, the report claims Carvana's operational stability is unduly dependent on affiliates, particularly DriveTime, whose financial contributions are said to be insufficiently transparent.
Gotham City's investigation suggests that Carvana's reported adjusted EBITDA is artificially bolstered by DriveTime's financial leverage. Without this crucial support, the short-seller argues, Carvana's earnings would face a dramatic collapse, failing even to cover its interest expenses. This critical assessment points towards a potentially precarious financial structure, raising questions about the long-term viability of Carvana’s business model as presented to investors.
The report also foresees a series of adverse consequences for Carvana, including the delayed submission of its 2025 10K report and the necessity for restatements of its 2023 and 2024 10K filings. A particularly damning prediction is the eventual resignation of Carvana's auditor, Grant Thornton, which would signal a severe blow to the company's credibility and financial oversight. These predictions collectively paint a grim picture for Carvana’s immediate future in the financial markets.
Moreover, Gotham City detailed DriveTime's financial activities from 2023 to 2024, highlighting over $1 billion in negative operating and free cash flow. This deficit was reportedly offset by an equivalent amount generated through new debt financing, pushing DriveTime's leverage ratios to an unprecedented 20x to 40x. Such high leverage, far exceeding historical norms, underscores the intricate and potentially risky financial ties between Carvana and its related entities.
The short-seller’s report further alleged the existence of numerous loans linked to vehicles sold by Carvana, which surfaced on VinAudit reports and on the balance sheet of Bridgecrest. Bridgecrest, reportedly wholly owned by Carvana's chairman and a major shareholder, Ernie Garcia, is accused of participating in transactions where Carvana sells loans to third parties at inflated rates. This arrangement, according to Gotham, allows Carvana to recognize undeserved gains, while Bridgecrest purportedly charges unusually low servicing fees to the same buyers, hinting at potential financial manipulation.
Following the release of Gotham City’s report, Carvana shares experienced a significant drop, plummeting by 17.08% to $396.06. This sharp decline reflects investor apprehension regarding the serious allegations. While technical indicators suggest short-term weakness, with the stock trading below its 20-day and 50-day simple moving averages, it remains above its 100-day SMA, indicating some lingering long-term strength. The neutral RSI and bullish MACD signal suggest a complex market reaction, where underlying resilience battles immediate investor concerns over the integrity of financial reporting.