CVNA Stock Rebounds After Analysts Call Carvana Short Report 'Significant Misrepresentation Of Facts'

JPMorgan analyst Rajat Gupta dismissed the short-seller report from Gotham City Research, questioning the representation of service income earned by DriveTime across Carvana’s loan monetization business.

• JPMorgan’s Rajat Gupta said that the crux of the short-seller report stems from an incorrect representation of the service income that DriveTime earned from Carvana’s loan monetization avenues.
• He also noted that there is a consistent theme of mixing up cumulative fair value metrics with annual and static metrics, which has resulted in a “significant misrepresentation of facts.”
• BTIG said that the most serious allegations against Carvana in the short-seller report are “not well-founded.”

Carvana Co. (CVNA) shares gained more than 6% in Thursday’s pre-market trade after analysts shot down a short seller report that cast a shadow of doubt over the company’s partnership with DriveTime.

According to TheFly, JPMorgan analyst Rajat Gupta dismissed the short-seller report from Gotham City Research, questioning the representation of service income earned by DriveTime across Carvana’s loan monetization business. Similarly, analysts at BTIG also shot down the accusations made by the short seller in its report released on Wednesday.

Carvana’s shares declined 14% in Wednesday’s regular trade following the release of the short-seller report.

What Are Analysts Saying?

JPMorgan’s Gupta said that the crux of the short-seller report stems from an incorrect representation of the service income that DriveTime earned from Carvana’s loan monetization avenues.

He also noted that there is a consistent theme of mixing up cumulative fair value metrics with annual and static metrics, which has resulted in a “significant misrepresentation of facts.”

While adding that the sell-off in Carvana shares on Wednesday was surprising, Gupta kept an ‘Overweight’ rating on the stock, with a price target of $510. This implies an upside of over 24% from CVNA’s closing price on Wednesday.

BTIG analysts noted that while it’s not news that Carvana and DriveTime are related parties, the short-seller report drew attention since DriveTime’s annual report was obtained for the first time through a Freedom of Information Act request.

The firm said that the most serious allegations against Carvana in the short-seller report are “not well-founded,” while adding that it disagrees with the calculation of DriveTime's leverage, servicing fee, and the write-down logic used in the report.

What Does DriveTime Do?

Founded in 2002, DriveTime is a used car retailer that offers customers with newer model vehicles with low mileage. Based in Tempe, Arizona, DriveTime sells and finances cars across 145 locations and has 3,800 employees.

The link between the two companies is Ernie Garcia II, who owns DriveTime and is Carvana's controlling shareholder. He is also the father of Carvana’s co-founder and CEO, Ernie Garcia III.

How Stocktwits Users Reacted

Retail sentiment on Stocktwits around Carvana was in the ‘bullish’ territory, with message volumes at ‘extremely high’ levels. The stock was the third-most-trending ticker on the platform at the time of writing.

One bearish user stated that the company would not have any profits if it weren’t for DriveTime.

However, a bullish user said they hope Carvana announces a stock split after earnings to attract more retail investors.

CVNA stock is down 3% year-to-date, but up 67% over the past 12 months.

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