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Carvana's Subprime Receivable Problem

Feb. 07, 2019 12:56 PM ETCarvana Co. (CVNA)49 Comments
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  • We found a buyer of Carvana subprime receivables, and it has numerous connections to an insider at the company.
  • Evidence indicates the buyer is massively overpaying for the receivables and thus inflating gross and operating profit at Carvana.
  • Management messaging on this topic has been misleading and raises concerns regarding credibility.

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Something unique is happening at Carvana (NYSE:CVNA). Somehow, Carvana sells subprime auto receivables - loans made to low-credit-quality customers in order for them to buy a car - for a profit. This is unique because every used auto retailer we spoke with pays a financing company to take its subprime receivables, whereas Carvana actually gets paid for them. Indeed, sophisticated companies like Carmax (KMX), which has its own captive financing unit and has been in business for 20 years, pays lenders to take its receivables.

Unfortunately, Carvana is not disclosing the entity buying its receivables, so we lack context. What if that entity has motivations other than just making a profit? What if that entity is connected to an insider at Carvana and, as a result, is knowingly overpaying Carvana for those receivables, thereby inflating gross and operating profit? Apparently enough people were inquiring that Carvana voluntarily released an investor FAQ that purports to addresses some of the questions.

The crux of the above FAQ: the only related party that has purchased Carvana’s receivables historically is Delaware Life Insurance Company (“Delaware Life”). Delaware Life is a related party and was disclosed as one because Mark Walter, an early Carvana investor and company insider, also has a substantial ownership interest in it (see page 28 of proxy statement). However, Delaware Life subsequently sold its interests and neither the entity that bought Delaware Life’s notes nor the current certificate holder is a related party to Mark Walter. Therefore, Carvana is not legally required to

This article was written by

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Professional investor for many years. I perform deep analyses and aspire to minimize cognitive biases to be an objective investor.

Analyst’s Disclosure: I am/we are short CVNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The author works at an investment firm that manages one or more investment vehicles that currently maintain investment positions in the common stock of Carvana Co. and CarMax, Inc. that will profit if the price of the common stock of those companies decline. We may change our views about our investment positions in these stocks, for any reason or no reason, and at any time may change the size, form or substance of our investment position in these stocks including within the first several days of the publication of this article, without notice to you. The information and opinions contained herein are the result of extensive research into the used car industry. Although we believe the statements contained herein are substantially accurate in all material respects, these companies and others may dispute the accuracy of them. We make no representation or warrant as to the accuracy or completeness of these statements, and expressly disclaim any liability relating to them. The statements herein are not investment advice or a recommendation or solicitation to buy or sell any securities. The shareholders of these companies and other investors should conduct their own independent research.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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