Long/Short Equity, Tech
Contributor Since 2010
Report Entitled "A Countrywide Auto Stock Promotion"
Spruce Point is pleased to issue a critical forensic "Strong Sell" report on Carvana Co. (NYSE: CVNA, Carvana or “the Company”). In our opinion, Carvana is a used car auto dealership masquerading as a high-growth technology-disruptive business. Carvana is majority owned and controlled by the Garcias, notably patriarch Eddie Garcia III, a convicted felon and owner of DriveTime. Given DriveTime's failures to IPO or sell itself, we believe Carvana was incubated as means to unlock value for the Garcias and early investors, at the onerous expense of new public shareholders. Burning >$350m per year and now heavily encumbered with CCC rated junk debt, we believe Carvana is becoming increasingly dependent on aggressive accounting and issuing stock grants to project growth to investors, while stemming employee defections. At best, we believe Carvana is worth $9.60 - $16.00 per share (50%-70% downside), and at worst its equity is worthless under a few plausible scenarios.
Our report will detail that Carvana is extremely dependent on subprime auto lending and origination, along with other questionable business practices that may skirt industry best practices, and the law. Its main financing partner, Ally Capital, appears to be slowly distancing itself, while a trust named Sonoran fills the void. Management has been unwilling to fully disclose the exact parties behind Sonoron, but claims they are independent.
Spruce Point sees 50%-70% downside risk given our belief that: 1) Carvana will never scale or hit its lofty long-term aspirations, 2) Its technology advantage claims are more likely designed to spin a stock sale story, 3) Its management lacks depth and public company experience running a levered business, 4) Its accounting and financial presentation is becoming more aggressive to provide the illusion of GPU growth, 5) Its Board, including former VP Dan Qualye, who in addition to his son, received political donations from the Garcias, should hardly be considered "independent", 6) It is heavily dependent on selling subprime auto loans at a time when a key counterparty is reducing exposure, and an opaque entity appears to be paying noneconomic prices, and 7) Carvana trades at a substantial premium to traditional auto dealers (AN, KMX, PAH, LAD, GPI, ABG, SAH) and peers that have both profitable business and reduced subprime auto loan exposure.
Carvana's equity could be entirely worthless if credit conditions change, its business were to come under greater regulatory scrutiny, or if incorrect representations concerning its auto finance loans sold required it repurchase such receivables. If equity investors were unwilling to backstop further losses and such risks, Carvana could face terminal bankruptcy.
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This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Carvana Co. (“CVNA”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.
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Disclosure: I am/we are short CVNA.