Gotham City Short Report on Carvana

quickly did some research during class:

1. accounting mismatch to drive up GPU making operational improvements seem better, where in reality most of those COGS are being moved to OPEX
2. Their business model depends on selling ABS, if they are unable to find buyers for their ABS while car defaults increase, they're going to be stuck with those on their balance sheet. They're also collecting payments for the SPV and so they're still on the hook
3. They make very non-recurring revenue from the residuals, if ABS becomes much more risky with these defaults, they'll lose those high-margin streams.
4. Warehouse lenders will refuse to lend or ask CVNA to put up much more collateral or just stop originating loans.
5. This will probably lead to a liquidity spiral with fixed costs continuing to pile up. Also, not to mention NWC is ridiculous for cars, as prices come down this could be horrible for their inventory (leading to writedowns like in 2022).
6. Most used car prices are going down, and the delinquencies are making the equity on these cars negative (loans > asset value) so like what's probably going to end up happening is a higher delinquency rate
7. There's also a lot of stuff going on with the CEO's father and he was in prison previously and his affiliate companies being major business partners.

This is just the surface, but one of the worst companies to hold in my opinion.

It's largely a regurgitation of past short reports, but they were able to get access to DriveTime financials and make a few more specific critiques. It's all overstated, and Gotham misunderstands and/or intentionally misconstrues the size and nature of the relationship between CVNA and DT. 

The stock will rally and reach new highs, as it has after every other short report. 

I shorted it in 2022 and did well out of it. I am thinking about shorting it again despite, to be frank, I don't understand the company in depth. And I know that I don't understand it, so I have to be careful.

What I do know however is #1 financing businesses are highly vulnerable when the music stops, so be careful the multiple you pay for them #2 investors are a little nervous about financing markets, look at APO and ARE stock prices #3 Carvana is a used car dealer/financier. Investors will defend high quality franchises going through tough times; they will not defend this one. They will flee like rats off a sinking ship just like they did last time #4 The type of investor who owns Carvana tends to own a fair bit of trash that will also hit the wall so you get negative rebalancing, outflows, forced selling etc. #5 Look at the 13f filing, many of the top "owners" are the market makers' call & put position. It's a speculative stock. I don't like owning stocks where that is the case. 

I don't think their report is super defensible. The key to their "earnings overstated by $1B+”  claim is they treat DriveTime’s negative operating cash flow as a “subsidy” to Carvana. But for a lender, negative CFO can reflect expanding a loan book, not “subsidizing” someone else.