Carvana (CVNA) - Deep Dive & Addressing Hindenburg's Short Claims

We initiate coverage on CVNA with an in-depth analysis of its long-term potential and a response to Hindenburg Research’s recent short report.

Summary

• CVNA’s unique model integrates an online marketplace with physical inventory management, a complex operational challenge that the company has successfully executed.

• If CVNA navigates its current auto loan situation — an outcome we believe is more likely than not — the company will be well-positioned for long-term growth.

• After weighing current risks against the long-term thesis, we see some upside potential in CVNA, although the discount has narrowed in recent weeks.

The extended version of this report is available for Convequity Entry & Premium subscribers at the Convequity website

Overview & Evolution

Founded in 2012, CVNA is transforming the $800bn US used car market by pioneering a fully online car-buying experience. Traditional dealerships rely on in-person sales, which can be time-consuming, opaque, and stressful for customers. CVNA disrupted this space with a no-haggle pricing model, detailed vehicle data, and flexible delivery options.

Early on, CVNA relied on centralized warehouses and third-party logistics, resulting in long wait times and high delivery costs. To address these inefficiencies, CVNA developed its own logistics network and introduced its now-iconic car vending machines. Over time, strategic acquisitions such as ADESA strengthened its wholesale capabilities and supply chain efficiency, enhancing its ability to scale and improve margins.

Following the post-pandemic correction, CVNA shifted from a growth-first mentality to profitability and operational efficiency. Today, its vertically integrated model provides a durable competitive edge in a fragmented market with substantial digital adoption potential.

Market Landscape

CVNA operates in a highly fragmented $800bn used car industry, historically controlled by traditional, regional dealerships that rely on outdated, in-person sales tactics. The company identified a key gap — consumer frustration with dealership interactions — and introduced a digital-first approach emphasizing transparency and ease of transaction.

Beyond retail sales, CVNA has expanded into financing, insurance, and trade-ins, providing a full-stack car-buying solution. More recently, its entry into the wholesale market via ADESA enables it to serve both individual and commercial buyers, further leveraging its infrastructure for incremental revenue streams.

Sales Distribution

CVNA employs a direct-to-consumer model with no physical dealerships. Vehicles can be delivered directly to a buyer’s home or picked up from vending machines, offering flexibility and convenience. In 3Q24, CVNA sold over 108,000 retail units, marking a 34% YoY increase.

When considering distribution, a useful analogy can be drawn between CVNA and Google. Google manages the Android OS that powers smartphones but does not manufacture devices itself. Similarly, CVNA oversees the logistics and infrastructure of buying and selling cars without producing vehicles. Both companies also offer complementary services — Google via its Play Store and ecosystem, and CVNA through financing, insurance, and extended warranties — deepening their customer engagement.

To extend the parallel, conversely, Tesla and Apple represent the vertically integrated model, controlling hardware, software, and customer experience end-to-end while targeting the premium segment of their respective markets. The CVNA-Google parallel highlights an alternative strategy: rather than owning the entire stack, CVNA optimizes logistics and technology to enhance efficiency and scale.

However, key differences exist. Google enables an ecosystem of hardware manufacturers, while CVNA competes directly with dealerships that act as extensions of automakers. Furthermore, Google dominates the smartphone OS market, whereas CVNA operates in a fragmented used car industry, limiting its market share compared to entrenched incumbents. These distinctions underscore the limitations of the analogy.

CVNA's acquisition of ADESA expands its presence in the wholesale market, leveraging ADESA’s auction network to facilitate vehicle sales to commercial buyers, including dealerships and fleet operators. This integration not only strengthens CVNA’s supply chain and pricing flexibility but also provides a crucial safety net for managing inventory risks. When acquiring vehicles from individual sellers, unexpected repair needs can arise, sometimes making refurbishment economically unviable. Instead of taking a full loss or scrapping these vehicles, CVNA can reroute them to ADESA’s auction platform, recouping a portion of the cost while maintaining capital efficiency. This capability helps mitigate financial exposure and enhances overall inventory management.

Competition

CVNA faces competition from traditional dealerships, online marketplaces like CarGurus, and hybrid models such as CarMax and AutoNation that blend physical and digital sales channels.

Emerging startups are experimenting with AI, VR, and AR to enhance the buying experience. However, these solutions typically address only specific elements of the value chain, such as virtual tours or AI-powered pricing, rather than offering an end-to-end digital car-buying solution like CVNA.

Recent failures in the online vehicle retail space highlight the complexities of scaling a pure-play e-commerce model. Vroom collapsed due to poor logistics execution, excessive costs, and a lack of investment in infrastructure. Similarly, Shift’s hybrid inventory approach led to inefficiencies and financial struggles, culminating in its bankruptcy in October 2023. These cases underscore the difficulty of replicating CVNA’s model without significant capital investment and operational expertise.

Competitor Overview:

• CarMax (KMX): Hybrid retailer combining physical dealerships with strong e-commerce capabilities.

• AutoNation (AN): Operates in both new and used vehicle sales with an expanding online presence.

• CarGurus & Cars.com: Online marketplaces reliant on third-party dealerships for transactions.

• TrueCar & Edmunds: Focus on digital retailing via dealership partnerships.

• Manheim (Cox Automotive): Wholesale auto auction leader with strong logistics.

• Tesla & Amazon Autos: Potential disruptors with direct-to-consumer models.

CVNA’s hybrid approach — bridging digital and physical inventory management — distinguishes it from competitors that lean heavily toward either retail or marketplace models. Only CarMax and AutoNation have demonstrated resilience post-pandemic, suggesting that evolving from brick-and-mortar to online is a more sustainable transition than the reverse.

Entry Barriers & Competitive Advantage

CVNA’s success stems from its ability to integrate digital sales with inventory management, a challenge that has stymied many new entrants. Startups attempting to replicate CVNA’s model face steep barriers, including:

• Infrastructure costs: Developing a logistics and reconditioning network requires significant capital.

• Operational expertise: Managing procurement, inspection, and delivery at scale is complex.

• Brand trust: Convincing consumers to buy vehicles online requires a proven track record of reliability.

CVNA has reinforced these barriers through continued investments, particularly its ADESA acquisition, which expands its logistics capacity to handle three times its current vehicle volume. This is great news for investors because going forward, capex as a percentage of revenue and free cash flow, should be significantly lower than in the past 2-3 years. As more ADESA sites are converted into inspection and reconditioning centers, CVNA will unlock additional cost efficiencies and pricing advantages that should flow through to free cash flow.

The company also benefits from a data flywheel effect: as transaction volume grows, its pricing algorithms and risk models improve, further enhancing its competitive edge.

Customer Experience & NPS Considerations

While CVNA promotes a strong Net Promoter Score (NPS), third-party sources paint a more nuanced picture. Comparably, and TrustPilot data suggest a mixed customer sentiment — 67% of TrustPilot reviews are 5-star, yet 19% are 1-star, indicating that a notable minority of customers have a poor experience. However, the actual percentage of dissatisfied customers may be lower, as satisfied buyers are generally less inclined to leave reviews.

Media reports have also highlighted customer complaints, which often stem from the inherent complexities of CVNA’s operational model rather than systemic failures. The company’s rapid expansion, particularly during the pandemic-induced demand surge, likely contributed to logistical bottlenecks and service inconsistencies. As the market stabilizes and macroeconomic conditions improve, CVNA has an opportunity to refine its processes, resolve inefficiencies, and enhance customer satisfaction.

Despite these challenges, CVNA’s customer experience still appears superior to that of its largest competitors, AutoNation and CarMax, based on TrustPilot ratings. This suggests that CVNA’s tech-driven, data-centric approach to car retailing is resonating with consumers more effectively than traditional dealership models. Addressing remaining workflow issues and improving service consistency will be key to further strengthening its brand reputation and customer loyalty.

Risks: Financial Challenges & Auto Loan Exposure

From 18th December to 3rd January, CVNA’s stock dropped 30%, but has recovered well since. The volatility is largely driven by Hindenburg Research’s critical short report, which alleges fraudulent activity and financial mismanagement. As is typical of Hindenburg, the report is structured to paint CVNA in the worst possible light to benefit their short position. While it does raise valid concerns regarding CVNA’s auto loan exposure, it does not present conclusive evidence of fraud or misconduct.

Comparing this to Hindenburg’s prior short report on Supermicro (SMCI) is insightful. In the case of SMCI, Hindenburg provided tangible evidence of minor related-party fraud but weakened its argument with incorrect industry insights, such as claiming SMCI was losing market share to Dell (DELL). With CVNA, the dynamic is reversed — Hindenburg’s fraud allegations lack substance, particularly concerning related-party transactions, yet its observations on auto loan risks merit closer examination.

CVNA’s auto loan portfolio accounts for approximately 40% of its gross profit. The company originates loans and sells them to third parties, thereby transferring most of the risk. Hindenburg points out that 35% of these loans are deep subprime, a category prone to high default rates. It also claims that delinquency rates among CVNA’s prime borrowers are higher than industry averages, suggesting the company may be misclassifying borrowers as prime to secure better financing terms.

One of the more serious claims in the report is that Ally Financial, a major buyer of CVNA’s loans, has reduced its purchases, leaving the company with more loans on its balance sheet than desired. To counter this, CVNA secured an $800m loan purchase agreement with Cerberus Capital. Hindenburg argues that this transaction constitutes an undisclosed related-party deal, as Dan Quayle — CVNA’s director and former U.S. Vice President — is also the Chairman of Cerberus Global Investments, a division of Cerberus Capital.

At first glance, the lack of disclosure raises concerns, but Cerberus is a reputable firm managing over $60bn in assets with strict fiduciary duties to its investors. Given this, it is difficult to see a clear-cut case of fraudulent intent. It is more plausible that the non-disclosure was an oversight rather than deliberate misconduct.

Notably, Hindenburg’s narrative about Ally Financial distancing itself from CVNA’s loan business has been undermined by recent developments. On January 6, 2025, Ally renewed its loan purchase agreement with CVNA, committing to buying $4bn worth of auto loans over the next year. This suggests that CVNA’s newer loan cohorts are performing better than those analyzed by Hindenburg, which likely focused on loans originated in 2022-2023. While the stock has yet to recover, this renewed partnership signals confidence in CVNA’s underwriting.

Macro factors may also alleviate some of CVNA’s loan-related risks. The used car market appears to be stabilizing, with price trends aligning with broader economic conditions. Additionally, if interest rates decline, as some analysts expect, auto financing affordability could improve, reducing default risk. Furthermore, CVNA’s recent operational shifts — prioritizing profitability over aggressive growth — should enhance its ability to absorb potential losses from its loan book.

Hindenburg also casts doubt on CVNA’s rising gross profit per unit (GPU), questioning how the company improved margins despite a 20% decline in used car prices since 2022. However, this criticism ignores a key factor — CVNA has increasingly sourced vehicles through its ADESA wholesale network, allowing it to secure inventory at lower costs. The resulting margin expansion explains much of the GPU improvement that Hindenburg finds implausible.

Ultimately, while Hindenburg’s concerns about CVNA’s auto loan exposure are worth considering, its broader allegations lack strong supporting evidence. CVNA’s willingness to serve the lower-end borrower market—often ignored by rivals like CarMax—reflects a strategic bet on its data-driven risk assessment capabilities. Using AI and machine learning, CVNA can evaluate borrower risk beyond simple FICO scores, potentially making subprime lending more viable than traditional metrics suggest.

The company’s approach resembles the evolution of high-yield bond markets, where “junk bonds” were once dismissed as uninvestable but later became widely accepted as “high-yield” instruments due to improved risk-pricing models. If CVNA continues refining its loan underwriting through advanced analytics, it could transform subprime auto lending in a similar fashion. However, this strategy carries inherent risk, as a deteriorating macro environment could exacerbate defaults.

Our analysis estimates a 3.0-3.6% loss rate on CVNA’s subprime loan book, translating to potential annual losses of ~$136m (details of this analysis are available to Convequity subscribers at the Convequity website). While this is significant, it remains manageable within CVNA’s growing cash flow profile. The renewed partnership with Ally, alongside potential macro tailwinds, suggests that the worst-case scenario outlined by Hindenburg may not materialize. Investors should remain cautious but recognize that CVNA has multiple levers to mitigate risk and sustain its recovery trajectory.

COVID-19: Boom and Near Collapse

From its inception, CVNA experienced rapid expansion, but as its revenue base grew into the billions, its growth rate naturally slowed. The onset of COVID-19, however, triggered a massive disruption in the automotive industry, creating a perfect storm that temporarily reignited CVNA’s momentum. Global supply chain issues restricted the production of new vehicles, dramatically increasing demand for used cars. CVNA, along with other used car retailers, benefited from this surge, with growth surpassing 100% during the peak of the pandemic.

However, as supply chain constraints eased and the balance between new and used car demand normalized in 2022, the market corrected sharply. Used car prices fell, interest rates surged, and CVNA found itself burdened with significant debt. The company’s stock plummeted by 99% from its August 2021 high to its January 2023 low, as investors feared insolvency. Faced with a liquidity crisis, CVNA took aggressive action — restructuring its debt, cutting costs, and streamlining operations to improve efficiency.

This crisis forced a fundamental shift in management’s approach, moving away from an unsustainable “growth-at-all-costs” mentality to a renewed focus on profitability and cash flow. Since 2022, CVNA has successfully transitioned toward a more disciplined financial model, improving margins and restoring revenue growth over the past three quarters.

Valuation & Investment Outlook

With only ~1% market share in an $800bn industry, CVNA has substantial room for growth. If digital penetration in used car sales reaches 10% and CVNA captures 50% of this market, it could achieve ~$40bn in revenue.

Our DCF model with base case parameters values CVNA at $300 per share, reflecting ~ 22% upside from current levels. While risks remain, operational efficiencies, improving macro conditions, and continued digital adoption support a favorable long-term trajectory. (Note: access to the DCF valuation model is available to subscribers at the Convequity website).

Conclusion

Despite past volatility, CVNA remains a leader in the evolving used car marketplace. Its vertically integrated model, strategic acquisitions, and tech-driven operations create durable advantages that are difficult to replicate. While auto loan exposure presents near-term challenges, its long-term growth potential remains compelling.