Carvana hit by short-seller report; Doug Kass' 10 surprises of 2026; The dangers of ticks
1) The stock of used-car retailer Carvana (CVNA), which I added to my "Stinky Six" list of stocks to avoid on December 12, plunged as much as 21.6% yesterday and ended the day down 14.2%.
The cause was this critical report published by activist short seller Gotham City Research. It alleges that Carvana's earnings are massively overstated and more dependent on "related parties" than disclosed – namely, DriveTime.
Gotham City got a hold of DriveTime's annual report via a Freedom of Information Act request – and what it showed was damning, causing the market to react violently...
For some background, privately held DriveTime is owned and controlled by billionaire businessman Ernest Garcia II. He founded the company (originally named UglyDuckling) and has built it into one of the largest used-car retailers in the U.S.
Garcia is Carvana's largest individual shareholder, even after sizable stock sales. Not only that, but his son, Ernest Garcia III, is Carvana's CEO! Together, they control around 80% of the company's voting power due to a dual-class share structure.
Given that DriveTime and Carvana are very similar businesses and buy and sell a large number of cars to each other, the potential conflicts of interest are massive.
Imagine you owned these two businesses and wanted to make billions of dollars... You'd have both entities buy millions of car and sell them. You'd extend billions of dollars in loans to the buyers, many of whom have bad ("subprime") credit and are therefore likely to default.
Then it would become clear which Carvana cars you overpaid for or require a lot of maintenance and which loans are likely to go bad. So you'd quietly have DriveTime buy them from Carvana at an inflated price. And, conversely, you'd sell Carvana the good cars and loans at a low price.
To top it off, you'd have DriveTime borrow lots of money to pay for this, leaving Carvana's balance sheet looking good.
As a result, DriveTime looks like a dog, with low margins and high debt – but nobody knows or cares because it's privately held.
Meanwhile, Carvana looks spectacular, with industry-leading growth and margins and a strong balance sheet – and the stock price goes parabolic.
Well, this is exactly what short sellers have long believed Carvana is doing – and Gotham City finally got the document that provides a lot of evidence for it. Gotham City alleges:
DriveTime ("DT") burned over $1 billion in cash flow from operating activities, and Free cash flow, from 2023-2024.
DT generated over $1 billion in cash flow from financing activities via debt issuance, from 2023-2024.
DriveTime leverage in 2023/2024 sits at 20x-40x, far higher than historical levels (capped at 10.3x before 2023).
DriveTime's ratio of [adjusted earnings before interest, taxes, depreciation, and amortization] to interest expense = 0.5x-1.0x, for 2023-2024. Far lower than previous years.
DriveTime marked down its loan portfolio by $900m while CVNA recognized gain on Loan sales of $755m in 2024.
CNVA 10K '24 claims it has and may sell loans to DriveTime, but the DriveTime [annual report] does not confirm this claim. Neither CVNA nor DriveTime disclose when nor how much.
How does this play into Carvana's earnings and share price?
The company had normalized earnings per share of $3.15 in 2024, which soared 75% to $5.51 last year. Analysts project 35% growth to $7.75 this year and 34% to $10 in 2027.
Seduced by such rapid growth and margins that far exceed that of competitors, investors have awarded Carvana's stock with nosebleed multiples...
At yesterday's closing price of $410.04, it's trading at 74.4 times 2025 earnings per share and 52.9 times this year's estimates (which I don't believe).
For further insight, I turned to the smartest financial analyst I know, whom I quoted in my December 12 e-mail and whose fund is short CVNA.
He thinks the disclosure of DriveTime and related entity GoFi's 2023 and 2024 financial statements are the most revealing part of the Gotham City report, writing:
At December 31, 2024, DriveTime had $6.7 billion in assets and only reported net income of $40.8 million for the year. And at December 31, 2023, it had $5.7 billion in assets and reported a $69 million loss for the year. (Both of those net income numbers include income attributable to a noncontrolling interest – otherwise the losses would have averaged around $270 million in each of those years.)
By comparison, Carvana had $8.4 billion in assets at December 31, 2024 and reported $210 million of net income for the year. And at December 31, 2023, it had $7 billion in assets and reported $450 million of net income for the year.
Although Carvana does have broad related party disclosures, it appears that DriveTime could be purchasing vehicles and/or receivables from Carvana at above-market prices to boost Carvana income at the expense of DriveTime.
He then brings up another related party:
Then, Carvana's "third party servicer," Bridgecrest, which is fully owned by Ernie Garcia II, charges a very low servicing fee of 0.117% per year. Given their businesses are similar, it is odd that DriveTime burned more than $1 billion in cash flow from operating activities and net lost money in 2023 and 2024 while Carvana had substantial earnings in 2023 and 2024.
It is staggering to think that Carvana had around $9.8 billion in assets at the last report (September 30, 2025) yet has a $90 billion market cap. Where would Carvana be without all these related-party transactions?
Meanwhile, the insiders at Carvana are selling billions of dollars' worth of stock at massively inflated values, which makes their losses at DriveTime and GoFi irrelevant.
He concludes:
Lastly, the Gotham City report points out that Carvana, DriveTime, Bridgecrest, and GoFi all share the same second-tier auditor, Grant Thornton, which was also the auditor for the recent Tricolor bankruptcy.
I agree with Gotham's prediction that the auditor could resign and that the 2025 10-K could be delayed along with prior-year restatements.
Meanwhile, the stock is up more than 7% this morning after JPMorgan published a piece defending it. Do people not realize that CVNA is a massive investment-banking-fee machine, so of course the "analysts" are going to be total wh*res?
For more on Carvana, see the links in my December 12 e-mail and these follow-ups:
- A look at Carvana's financials and valuation (December 15)
- The bull-bear debate on Carvana (December 16)
- Discussing Carvana with my short-seller friends (December 18)
To summarize, I think yesterday's drop is just the first leg down for Carvana's stock – and that it could possibly be a zero. So I'd continue to avoid it at all costs.
2) For the 24th consecutive year, my friend Doug Kass of Seabreeze Partners has released his possible surprises for the upcoming year.
Normally Doug's articles are behind a paywall. But he was kind enough to share a link to a site that all of my readers can access here.
These aren't events he thinks are likely but rather his "predictions of what could happen during the year." I always enjoy reading them – they're good food for thought. And I've found that a surprising number of them come to pass!
One could argue that Surprise No. 9 has already come to pass: "Predictive products and the gambling markets become driven by fraud, corruption and enormous 'up-front' payoffs to guarantee outcomes (at both the college and professional levels)." That's based on this recent story, as reported by AP News: A $400,000 payout after Maduro's capture is putting prediction markets in the spotlight.
I think Surprises No. 3 and No. 6 are most likely: "The AI economy and (a heavily weighted and imbalanced) stock market dependent on AI show signs of interruption, then disruption," and "The bill finally comes due from the 2020-2022 [leveraged buyouts] that relied on low cost debt that now can't be effectively rolled over."
And I think Surprise No. 1 is least likely: "War Breaks Out Throughout the World, the President Resigns and Equities Decline by More Than 20% in 2026."
Thanks for sharing, Doug!
3) My e-mails on Friday, Monday, and Tuesday about my father's health scare generated more reader feedback than anything I've ever written...
As a reminder, he caught African tick bite fever on a holiday in South Africa earlier this month. He became extremely weak and had to be hospitalized in Kenya, where he and my mom have lived for 22 years.
For six days, the best doctors in the country couldn't figure out what was wrong with him – until I typed his symptoms into Google Gemini, which immediately came back with the right answer. The doctors then put him on the right antibiotic, he quickly improved, and he went home four days later.
Today and in upcoming e-mails, I'll pass along some of the most insightful things my readers shared in the hopes that it might help others more quickly diagnose an illness and better navigate our often-nightmarish health care system...
Dave R. begins with an important reminder:
Ticks and tick-borne illness are exploding across the globe. So the next time someone in Africa (or in the U.S., for that matter) has exhaustion like your dad had without underlying respiratory or gastrointestinal symptoms, and if that person has spent much time outdoors, always ask that the doctors run a tick panel.
He then expounds on the dangers of tick bites in various regions of the U.S.:
Where I live in New England, what used to be Lyme disease from the deer tick is more frequently also Anaplasmosis and/or Babesiosis. Less frequent but increasing are Ehrlichiosis, Borrelia miyamotoi disease, and Powassan virus disease.
Lone star ticks: These have invaded the Northeast as far north as Maine, transmitting Ehrlichiosis, Tularemia, and Alpha-gal syndrome (red meat allergy).
Gulf Coast ticks: Recently identified in the Northeast (New York, New Jersey, and Connecticut), they can transmit Rickettsia parkeri rickettsiosis, a disease similar to Rocky Mountain spotted fever.
American dog ticks: They're common in the region and responsible for rare cases of Rocky Mountain spotted fever. More frequent in the Southeast and South Central. I know someone who got it at a race in the Tennessee woods.
Dave has a personal experience with tick-borne illnesses:
My wife got a tick-borne illness two-and-a-half years ago. She had been doing some hiking and mountain biking in eastern Long Island. A few days later, she got a bad headache and couldn't get out of bed. No stomach or respiratory issues, just exhausted.
I took her to the doctor for blood work and told her to get a Babesiosis and Lyme disease tests. Her doctor never heard of Babesiosis but luckily agreed to run the tests – and she had both. Her red blood cell count had gone way down, but the treatments worked and she quickly got better. (Babesiosis is a parasite and Lyme is a bacterial infection, so they need different treatments.)
Since then, I learned to just ask for a tick panel, which covers several tick-borne diseases – I heard this from a friend who was going in for a pre-op for hip surgery and they discovered a tick in his groin.
He concludes:
So, word to the wise: Tick disease should be at the top of the list for you, your family, and your friends who spend the nonwinter months outside. My wife never even saw the tick.
Every year, the ticks keep getting worse. After we go for a hike, we immediately put our clothing in the wash, take showers, and do inspections. When my friends ask me if I'm afraid of bears or snakes when hiking and camping, I tell them no – I'm afraid of ticks.
Thank you for sharing your experiences and insights, Dave!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.