The share price of Carvana, an online used car dealership, dropped by 11% on Wednesday following allegations from short seller Gotham City Research regarding related-party transactions involving the company and its closely linked sister firm, DriveTime Automotive. Gotham’s critical analysis included financial statements revealing that DriveTime faced a cash burn of $1 billion over 2023 and 2024, coinciding with a period of profitability for Carvana.
Trading in Carvana’s shares began to decline Wednesday morning after Gotham previewed its findings on social media. Following the full report’s release after 11 AM, the stock plummeted further, reaching a decline of 13% during early trading hours. Gotham asserted it had legally acquired DriveTime’s confidential financial data. This scrutiny rekindles discussions surrounding related-party transactions and the adequacy of financial disclosures, which have been points of contention since Hindenburg Research raised similar concerns about Carvana’s accounting practices in January of the previous year.
Carvana, managed by Ernie Garcia III, emerged from the DriveTime dealership chain owned by his father, Ernie Garcia II, who retains a 14% ownership stake. The company remarkably sidestepped bankruptcy in 2022 and has dramatically increased its share price from a low of $4 to $473 this month, based on cost-cutting measures and creditor agreements. In 2023, Carvana reported profitability, achieving $1.4 billion in adjusted earnings before interest, depreciation, and amortization for 2024.
Additionally, Gotham’s report highlighted DriveTime’s rising debt levels, which increased by $800 million to $4.3 billion in 2024, raising concerns about the sustainability of consumer credit in the broader automotive market.
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