JP Morgan Responds to Hindenburg Research’s Carvana (CVNA) Short Report: “No Red Flags Found in Our Analysis”

JP Morgan Responds to Hindenburg Research’s Carvana (CVNA) Short Report: “No Red Flags Found in Our Analysis”

This article is not intended as investment advice. The author holds no positions in any of the discussed stocks.

Hindenburg Research Takes Aim at Carvana

Hindenburg Research, well-known for its critical reports on companies, has kicked off 2025 by launching a thorough and contentious investigation into Carvana (CVNA), the online platform for buying and selling pre-owned vehicles. Despite a substantial decline in Carvana’s stock value, an unexpected ally, the banking giant JP Morgan, has come to the company’s defense.

Key Allegations Against Carvana

Hindenburg’s report titled “Carvana—A Father-Son Accounting Grift For The Ages”raises several significant concerns regarding the company’s business operations:

  1. Valuation Issues: Carvana’s stock is reported to be overvalued, trading at an astonishing 845% higher sales multiple compared to competitors like CarMax and AutoNation, despite a 20% drop in used vehicle prices over the past three years.
  2. Loan Sales Dependency: The company’s revenue heavily relies on the sales of repackaged car loans. Recently, Carvana’s transactions with Ally Financial, its major loan partner, have diminished as previous commitments are set to expire in January 2025.
  3. New Loan Buyer Controversy: A newly identified buyer of these loans, linked to Cerberus Capital and featuring Carvana Director Dan Quayle in its leadership, raises concerns over undisclosed related-party transactions.
  4. High-Risk Borrower Focus: The current business model favors packaging loans for subprime borrowers, escalating the risk associated with their loan portfolio.
  5. Lax Underwriting Standards: Reports suggest Carvana’s approval rate is alarmingly high, raising questions about its underwriting practices.
  6. Questionable Accounting Practices: Allegations point to related-party transactions boosting reported revenues through unconventional accounting methods.
  7. Revenue from Related Parties: In 2023, $145 million, approximately 8.4% of gross profit, stemmed from related parties, casting further doubt on the company’s financial integrity.
  8. SEC Investigation: Hindenburg Research highlights ongoing scrutiny by the SEC, as indicated by findings from Disclosure Insight.

JP Morgan Defends Carvana

In a counter to Hindenburg Research’s claims, JP Morgan has issued an investment note reaffirming its ‘Overweight’ rating on Carvana’s stock. The firm acknowledges the necessity for greater transparency but emphasizes that its prior analyses from 2019 and 2022 did not uncover any concerning issues.

“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.”

JP Morgan acknowledges valid concerns about broader industry defaults but argues these are longstanding issues. The firm points out that the automotive market is shifting positively, with stabilizing inflation, leveling used car prices, and steady unemployment rates.

A Bright Future Suggested by JP Morgan

In a notable endorsement, JP Morgan concludes:

“We do not view CVNA’s reported economics as inflated.”

With a price target of $300 for Carvana shares, JP Morgan is actively challenging the narratives put forth by Hindenburg Research, a firm known for its impactful analyses of high-profile corporate struggles.

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