Carvana shares drop 14% after short seller alleges earnings inflation

On the Dash:

• Carvana shares dropped sharply after a short seller accused the company of overstating earnings through related-party transactions.
• The allegations center on financial ties to businesses owned by the CEO’s father, raising renewed scrutiny of Carvana’s accounting practices.
• The report revives long-standing concerns from short sellers following Carvana’s dramatic stock rebound since 2022.

Shares of Carvana fell 14.2% Wednesday after short seller Gotham City Research alleged the online used-car retailer overstated earnings in 2023 and 2024 by more than $1 billion through extensive reliance on related-party transactions tied to the Garcia family.

The report claims Carvana’s financial performance is more dependent on businesses controlled by CEO Ernie Garcia III’s family than previously disclosed. Gotham specifically cited DriveTime Automotive Group and Bridgecrest Acceptance Corp., both owned by Ernest Garcia II, Carvana’s largest shareholder and the CEO’s father.

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To support its claims, Gotham published what it said were the 2024 audited financial statements of DriveTime and Bridgecrest. The firm said the documents were obtained through Freedom of Information Act requests. 

Gotham alleged that Carvana’s earnings were heavily influenced by DriveTime’s debt issuance and loan activity, which the firm characterized as “toxic,” as well as by accounting irregularities tied to related-party arrangements.

The allegations mark the latest challenge for Carvana, which has faced repeated scrutiny from short sellers in recent years. Disbanded short seller Hindenburg Research last year disclosed a bet against the company, arguing that Carvana’s turnaround was a “mirage” supported by unstable loans and accounting manipulation.

Despite those concerns, Carvana’s stock has staged a dramatic rebound since a bankruptcy scare in late 2022. Shares had traded below $5 at that time before climbing steadily over the past two years. The stock closed Tuesday at more than $477 per share following the company’s recent inclusion in the S&P 500.

Wednesday’s selloff pushed Carvana shares down to $410.04 at the close, marking the company’s second-worst trading day over the past year.

The sharp decline underscores lingering investor sensitivity around Carvana’s financial structure and its reliance on affiliated businesses, even as the company has regained market confidence following its turnaround and index inclusion.