Shares of Carvana Co (NYSE: CVNA) fell significantly on Wednesday after Gotham City Research published a critical report questioning the company’s accounting practices and earnings reports. The stock’s decline reflects mounting investor caution amid assertions that Carvana may have significantly overstated its earnings from 2023 through 2024 and exhibits a reliance on related-party transactions not fully disclosed to shareholders.
The research firm Gotham City Research argues that Carvana's reported earnings for 2023 and 2024 are inflated by over $1 billion. The report indicates that Carvana's earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) is substantially supported by financial leverage from DriveTime, a related entity. Gotham suggests that in the absence of credit assistance from DriveTime, Carvana’s earnings would deteriorate to an extent where adjusted EBITDA would no longer cover its interest expenses.
Further, Gotham forecasts delays in Carvana’s regulatory filings, specifically a postponement of the 2025 Form 10-K. The report also predicts restatements of Carvana's 2023 and 2024 10-K filings, accompanied by the potential resignation of auditor Grant Thornton in response to emerging concerns. These projections highlight significant governance and compliance risks facing Carvana.
In addition to these accounting-related concerns, the report highlights cash flow issues with DriveTime, noting that it reportedly burned more than $1 billion in operating and free cash flow from 2023 to 2024. Concurrently, DriveTime generated over $1 billion in financing cash flow through new debt issuance, pushing its leverage ratio between 20 and 40 times during that timeframe. Such leverage levels are far above historic norms, reflecting elevated financial risk.
Gotham’s examination also uncovered numerous loans associated with vehicles sold by Carvana appearing in VinAudit reports and on the balance sheet of Bridgecrest, which the report states is fully owned by Carvana chairman and significant shareholder Ernie Garcia. The short seller contends that Carvana sells loans to third parties at artificially inflated prices, enabling it to book gains on these transactions. In turn, Bridgecrest reportedly charges unusually low servicing fees to the buyers of these loans, suggesting a financial arrangement that may obscure true economic value.
The market responded sharply to the report’s allegations. At the time of the report’s release, Carvana’s stock price declined approximately 17%, falling to around $396.06 per share. Technical indicators reinforce signs of near-term weakness in the shares. Currently, Carvana trades about 12% below its 20-day simple moving average and 5.3% below its 50-day SMA, signaling immediate downward pressure. However, it maintains a modest 2.6% premium above its 100-day SMA, indicating some resilience over a longer timeframe.
Additional market metrics offer a mixed picture of momentum. The Relative Strength Index (RSI) is near 62.69, suggesting a neutral stance rather than being overbought or oversold. Meanwhile, the Moving Average Convergence Divergence (MACD) remains above its signal line, implying some underlying positive momentum despite the recent sell-off. Traders and investors may view these conflicting signals cautiously amid increasing uncertainty surrounding Carvana’s financial status.
Efforts to obtain comment from Carvana regarding Gotham City Research’s report remain outstanding. The company has yet to publicly address the specific allegations detailed in the short seller’s analysis.
This situation highlights the significant challenges Carvana currently faces, including critical scrutiny of its financial reporting, its operational dependence on related entities, and potential governance issues inherent in its accounting and loan practices. As such, investors should closely monitor subsequent corporate disclosures and regulatory filings for further developments.