Will Carvana Need a Batmobile to Navigate Gotham City?

Shares of Carvana  (CVNA)  bounced 4.25% Thursday, after plunging to a 14% loss on Wednesday. Carvana is being targeted by short sellers who are questioning the auto seller’s accounting practices.

Wednesday’s volatility took us out of our Carvana long position. Our strategy for the Tempe, Arizona-based auto retailer was initially presented in this December 9 article.

We are now out of our position, with no plans to buy the stock again in the near future. Accurate or not, the allegations could weigh heavily on Carvana in the near term. 

Allegations

I’m not suggesting that Carvana is guilty of any wrongdoing, but the pattern of allegations is worrisome. The latest comes from Gotham City Research. Last year, both Jim Chanos and Hindenburg Research turned negative on the stock. 

Two months ago (point A), Gotham focused on Iron Mountain  (IRM) , on allegations of irregular accounting practices (point A). The Boston-based information technology company initially sold off, but has rebounded over the past month. There has been no proof of wrongdoing on Iron Mountain's part. 

On Thursday, JPMorgan analyst Rajat Gupta defended Carvana, suggesting that Gotham City Research may have mixed or confused annual results with longer-term cumulative figures. Also, a Carvana spokesperson has deemed the charges misleading.

Hindenburg Shorted Super Micro Computer

I won’t rule out buying Carvana in the future, but it takes time for a company to recover from these types of allegations.

For example, Hindenburg alleged accounting irregularities by Super Micro Computer  (SMCI)  in August 2024 (arrow). In the midst of a bull market, shares of the San Jose-based provider of advanced servers have been nearly halved since that report was issued (arrow). An independent investigation found no evidence of wrongdoing. 

Carvana Hits One Target, Misses Another

Here’s our Carvana post-trade analysis:

Using the A-B-C-D pattern described in this article, our entry was $415 (green). The entry occurred on January 2. It was a volatile day that nearly caused our stop ($385, red) to be taken out on day 1 of the trade. 

We managed a gain of $60 per share on half of this position. This occurred when the price reached our first target $475 (blue) on January 22. Sadly, the second target of $530 (point D, blue) was not achieved.

That’s because our stop was hit at $385 (red) on January 26. This resulted in a loss of $30 per share on the second half of the position.

The net result is a small gain. Not great, but we’ll take it.

Bottom Line 

The pressure from these allegations won't go away overnight. On the positive side, despite earlier allegations, there is no proof of wrongdoing on the part of Carvana. 

Shorting this stock isn’t advisable. In a roaring bull market, you’re more likely to be squeezed, regardless of the veracity of the accusations.

In the meantime, I plan to wait for the dust to settle. Carvana still has potential, and I'll be waiting for a technical setup before opening a new position. 

At the time of publication, Ponsi had no positions in any securities mentioned.