Carvana Can’t Stop Falling. Is This Where the Wheels Finally Come Off?

Carvana (NYSE:CVNA | CVNA Price Prediction) shares have surged 3,100% over the past three years, defying critics and short-sellers who pointed to suspicious financial deals involving related parties like DriveTime and Bridgecrest. Despite this run, a January report from Gotham City Research accused the company of hiding over $1 billion in expenses through undisclosed transactions, inflating profits, and deeming the stock “uninvestable.” 

The allegations triggered an immediate plunge in shares that day, and the stock has continued trailing lower over the past two weeks. In afternoon trading today, the online used car dealer is tumbling another 10% lower on reverberations emanating from a short-seller’s recent report. With the stock down 29% from its all-time high, is this where Carvana begins careening out of control?

“Accounting Grift” Allegations Still Haunt Carvana

The Gotham City report, titled “Carvana: Bridgecrest and the Undisclosed Transactions and Debts,” claims Carvana’s 2023-2024 earnings are overstated by more than $1 billion. It highlights deep ties to related entities controlled by Ernest Garcia II, the father of Carvana CEO Ernest Garcia III, including DriveTime, a used-car retailer and subprime lender, as well as Bridgecrest and GoFi. 

According to the report, these relationships involve loan-level intermingling and accounting irregularities that subsidize Carvana’s results. For instance, it alleges DriveTime burned through over $1 billion in cash from 2023 to 2024 while leveraging up to 20x to 40x EBITDA to support Carvana. Bridgecrest is said to have marked down billions in loans, allowing Carvana to recognize gains on sales. The report predicts potential delays in Carvana’s annual 10-K filing and financial restatements due to these issues. 

Gotham obtained DriveTime’s 2024 annual report via a Freedom of Information Act request, adding evidence to the claims. Carvana responded by calling the report “inaccurate and intentionally misleading,” stating all related-party transactions are accurately disclosed in its financial statements. The company plans to release its 2025 earnings on Feb. 18 as scheduled. 

While some Wall Street analysts have defended Carvana, noting the report mixes cumulative and fair-value metrics, leading to misrepresentations, the allegations have sparked shareholder litigation investigations into potential securities law violations.

Why the Sharp Drop Today?

Despite no company-specific news early on, Carvana continued to extend its losses from the Gotham report. Investor anxiety appeared tied to the upcoming earnings release next week, amid ongoing scrutiny of the short-seller claims. The report’s focus on related-party dealings has raised doubts about the sustainability of Carvana’s turnaround, potentially eroding confidence. 

However, around noon today, it was reported a federal judge had granted a securities litigation plaintiffs’ motion to compel the production of DriveTime attachments that were previously withheld and were designated “Attorneys’ Eyes Only.” It brought home the legal risks attached to the Gotham City report.

Used Car Market Shows Mixed Signals

The used-car sector is also showing weakness. Elevated prices are limiting demand amid affordability concerns, causing retail sales to slow and reflecting softer economic conditions and high interest rates.

However, January saw a 5% year-over-year increase in used-vehicle inventory to 2.23 million units, as dealers replenished lots. This uptick likely anticipates seasonal buying spurred by tax refunds, which often boost consumer spending in the first quarter. Retail sales pace remained strong, up 2.9% year-over-year in the latest 30-day period, reaching 1.34 million units in December. 

Despite this, forecasts predict a slight 0.7% decline in 2026 used retail sales to 20.3 million units, due to supply constraints from lower past production, fewer lease returns, and weak EV sales. Average used-vehicle prices in January stood at $28,550, up $490 from a year ago, underscoring ongoing tightness. 

Key Takeaway

This is not a buy-the-dip moment for Carvana stock. The latest allegations against the dealer have stung worse than past reports, and though management has refuted the charges as misleading, the stock’s lofty valuation exceeds industry averages and its own fundamentals. Ongoing investor scrutiny and potential regulatory reviews could prolong Carvana’s crash lower.