Why Spruce Point Believes CVNA Has 50%-70% Intermediate Downside Risk, And Is Potentially Worthless

Feb. 12, 2019 9:53 AM ETCarvana Co. (CVNA)AN, GPI, KMX, LAD, SAH
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Long/Short Equity, Tech

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Mr. Axler is the Founder and Chief Investment Officer of Spruce Point Capital Management, an activist hedge fund manager. Mr. Axler also co-founded Prescience Point Research Group (2012-2014). Mr. Axler specializes in activist short-selling, forensic financial research, and has exposed over $1.0 billion of alleged listed frauds on Nasdaq and the NYSE. Prior to founding his company in 2009, Mr. Axler spent eight years as an investment banker with Credit Suisse and Barclays Capital where he structured and executed billions of dollars of financing, derivative risk management, and M&A deals for leading Fortune 500 clients. Mr. Axler is a contributing writer to Seeking Alpha, has been profiled in Barrons, and in the book "The Happiness Advantage: The Seven Principles of Positive Psychology That Fuel Success and Performance at Work." Mr. Axler's short research has been profiled by the National Bureau of Economic Research (NBER) in an analysis entitled "How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation," and shown to produce superior investment returns. In addition, according to a research study from Sumzero analyzing 12,000 analysts recommendations since 2009, Mr. Axler ranked #1 globally for idea performance. A recent analysis by Sentieo ranked Mr. Axler's @sprucepointcap profile the 13th most influential financial blogger on Twitter. Mr. Axler graduated from Yale University with a masters degree in Statistics, and received both a Bachelor of Arts degree in Statistics and a Bachelor of Science in Marketing and Business Administration from Rutgers College, where he graduated with Summa Cum Laude and Phi Beta Kappa honors.


  • Carvana (CVNA) was incubated under DriveTime whose CEO is a convicted felon. DriveTime could not go public, so we believe the Garcia family is indirectly monetizing its holdings thorough CVNA.
  • CVNA has all the markings of stock promotion; hyping its ability to disrupt the car purchasing process through gimmicky vending machines and internet purchases while burning >$350m/yr.
  • CVNA is now indebted w/CCC junk and selling subprime auto loans to an entity named Sonoran, and it is unclear who its backers are.
  • Tightening credit conditions, and questionable business practices coming under greater scrutiny are tail risks that could wipe out the equity.
  • CVNA trades at 1.5x sales on the misperception it will scale to profits and be a lasting industry disruptor. In reality, auto dealers trade at 0.50x-0.75x which would yield a 50%-70% downside risk.

Executive Summary

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.

Our detailed research report is available on our website. We also encourage all of our readers to follow us on Twitter @sprucepointcap for regular updates. Please review our disclaimer at the bottom of this email.

Thank you very much for your continued interest in our investment research. Please read our investment disclaimer below. 


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.

This research presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of CVNA or other insiders of CVNA that has not been publicly disclosed by CVNA. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. You should assume all statements made are our opinions, unless sourced as facts where practical.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to Sell or a solicitation of an offer to Buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor, broker/dealer, or accounting firm. You should consult your own tax, accounting, and financial advisor before making any investment decision. 

Disclosure: I am/we are short CVNA.

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