In the world of activist short selling, few stories are as humbling as Carvana (NYSE: CVNA). Despite two detailed reports from respected firms, the stock has delivered one of the most spectacular runs in recent memory—rising 1,491% from Kerrisdale Capital's initial report price of $21.26 to $338.26 as of July 1st, 2025.

The Kerrisdale Warning (June 12, 2023): CVNA Price: $21.26

Kerrisdale Capital's "Running on Empty" report declared Carvana shares "worthless," highlighting the company's unsustainable reliance on selling subprime auto loans for profitability. They identified crushing debt burdens, questionable loan quality, and vulnerability to credit market changes.

Despite the detailed analysis, the stock surged 229% by their February 2024 follow-up report.

The Hindenburg Finale (January 2, 2025): CVNA Price: $199.56

Hindenburg Research's final report before disbanding provided smoking gun evidence of Carvana's loan sales dependency. Key findings:

• 26% of gross profit came from selling customer auto loans over nine months

• $800 million in suspected related-party loan sales to undisclosed buyers

• Root Insurance windfall: $158 million Q1 2025 benefit from warrant gains (3.7% of revenue)

• Heavy focus on subprime borrowers with 44% of recent loans underwater

Even after this damning report, the stock recovered from a brief dip to reach new highs.

Why The Activists Are Likely Right (But Early)

The Unsustainable Model

Carvana's apparent success depends on two questionable pillars:

1. Subprime Loan Sales: Originating risky loans and selling them immediately for profit while transferring long-term risk to buyers

2. Root Warrant Gains: Financial engineering through insurance company investments that mask core business performance

The Timing Question

Several factors have allowed this model to persist longer than activists expected:

• Extended low interest rate environment

• Resilient used car market

• Strong investor risk appetite

• Management's financial engineering skills

When The Music Stops

The activist thesis becomes reality when:

• Credit markets tighten and buyers refuse subprime loans

• Root warrant gains disappear or turn negative

• Economic stress impacts Carvana's subprime customer base

• Regulatory scrutiny limits related-party transactions

Without loan sales profits and Root gains, Carvana would need to rely entirely on automotive retail margins—historically insufficient to cover their cost structure.

The Activist Case Vindicated?

Both Kerrisdale and Hindenburg identified structural vulnerabilities in a business model dependent on:

• Continuous access to willing loan buyers

• Sustained performance of external investments

• Favorable credit market conditions

• Minimal regulatory oversight

The stock's remarkable performance doesn't invalidate this analysis—it highlights the challenge of timing market recognition of fundamental problems.

Conclusion

The Carvana story serves as a powerful reminder that activist short selling often requires extraordinary patience. While the market timing has been challenging, the fundamental analysis appears sound. When the loan sales engine finally stalls and Root warrant benefits disappear, it may happen quickly and dramatically.

For the activist short seller community, this case study reinforces that identifying structural problems and timing their market recognition are two very different challenges. The best activist research often requires the most patience to be proven correct.

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