Carvana plunges 14% after short-seller alleges $1B earnings overstatement
Gotham City Research claims hidden related-party transactions with DriveTime and Bridgecrest artificially boosted results
Carvana shares plunged 14.4% to $408.98 on Wednesday after short-seller Gotham City Research alleged the online car retailer overstated earnings by more than $1 billion through undisclosed related-party transactions with DriveTime and Bridgecrest.
The Gotham City Research report, released Tuesday, claims Carvana's 2023 and 2024 adjusted EBITDA was artificially inflated by financial support from DriveTime, which operates at leverage levels estimated between 20x and 40x. Without this leverage support, Carvana's earnings would "collapse" and adjusted EBITDA would be insufficient to cover interest expenses, according to the short-seller.
"Carvana is significantly more dependent on its related parties, DriveTime and Bridgecrest, than publicly disclosed," Gotham City stated. The firm identified numerous loans tied to cars sold by Carvana appearing on VinAudit reports and the balance sheet of Bridgecrest, which is fully owned by Carvana chairman Ernie Garcia.
The allegations include claims that DriveTime burned over $1 billion in operating and free cash flow between 2023 and 2024 while simultaneously generating over $1 billion in financing cash flow through new debt. Gotham City also alleges Carvana sells loans to third parties at inflated rates to recognize gains, with Bridgecrest then charging those buyers unusually low servicing fees.
Following the report's release, several law firms announced investigations into Carvana for potential securities-law violations. Block & Leviton, a firm specializing in shareholder rights, invited investors who purchased Carvana securities to contact the firm regarding potential recovery of losses.
The sharp sell-off wiped approximately $17.3 billion from Carvana's market capitalization, which stood at nearly $103 billion before the report. The stock's decline accelerated during afternoon trading, with volume surging to more than three times the daily average over the past three months.
Despite the serious allegations, Wall Street analysts have largely maintained their bullish outlook on the stock. JPMorgan on Wednesday reiterated its "Overweight" rating and raised its price target to $510 from $490, representing more than 24% upside from current levels. The upgrade came even as the stock was reacting to the short-seller report, according to analyst tracking.
Other firms have also recently increased targets: Wells Fargo raised its price target to $525 with an "Overweight" rating on January 27, while Barclays lifted its target to $530, BTIG to $535, and UBS to $545—all maintaining buy-equivalent ratings. The consensus median price target across 43 analysts stands at $500, with a range from $330 to $600.
Gotham City Research, known for targeting companies with alleged accounting irregularities, predicted that Carvana's auditor Grant Thornton may resign and that the company will delay its 2025 Form 10-K filing while preparing financial restatements for 2023 and 2024. The short-seller did not disclose a short position in its report.
Carvana's high valuation has raised concerns among some market participants even before Wednesday's report. The stock trades at 107 times trailing earnings and 29 times book value, reflecting investor enthusiasm for its digital-first approach to used car retailing. The company has delivered strong operational performance recently, with quarterly earnings growth of 60.9% year-over-year and revenue growth of 54.5% through the third quarter of 2025.
The allegations come at a sensitive time for Carvana, which has worked to rebuild investor confidence after its near-bankruptcy experience in 2022. The company has since returned to profitability and expanded its market share in the used car sector, with its seven-day return policy and home delivery helping differentiate it from traditional dealerships.
Investors will be watching closely for any official response from Carvana management regarding the allegations, as well as any indications about the timing of its upcoming 10-K filing. The company has not yet issued a public statement addressing the Gotham City Research report.