Hindenburg Research, known for its short-selling reports, has released a critical analysis of Carvana (CVNA), the online used car retailer. However, JP Morgan, a major Wall Street firm, has unexpectedly come to Carvana's defense, maintaining an 'Overweight' rating on the company's stock.
Hindenburg Research's Allegations
Hindenburg Research's report, titled "Carvana—A Father-Son Accounting Grift For The Ages," raises concerns about Carvana's business model, including:
- Overvaluation: Carvana is trading at a significantly higher sales and earnings multiple compared to its peers.
- Loan Sales: Carvana sells repackaged car loans, with concerns about a related-party buyer after a deal with Ally Financial ended.
- Subprime Loans: Carvana's loan book is heavily weighted towards non-prime and subprime borrower loans, potentially due to lax underwriting standards.
- Related-Party Accounting: Carvana's financials are allegedly propped up through various related-party transactions.
- SEC Investigation: Carvana is reportedly under investigation by the SEC.
JP Morgan's Response
Despite these allegations, JP Morgan has issued a note reaffirming its positive view of Carvana, stating that its independent analysis from 2019 and 2022 did not find any major red flags, particularly concerning the company's accounting practices and free cash flow.
"Our own analysis...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
JP Morgan concedes the need for more transparency from Carvana but believes that concerns about auto industry defaults are not new and are improving. JP Morgan maintains a $300 stock price target for Carvana, standing in opposition to Hindenburg Research.
"We do not view CVNA’s reported economics as inflated." - JP Morgan
This sets up a battle between one of Wall Street's giants and a well-known short-seller, known for impacting major companies.
