Carvana's stock came under heavy selling pressure on Wednesday as newly circulated allegations concerning the online auto retailer's relationship with DriveTime emerged. The disclosures followed the release of DriveTime's 2024 10-K via a Freedom of Information Act request tied to a class-action suit. In response, BTIG issued a forceful rebuttal, arguing that the most material accusations do not hold up to scrutiny.
In a note circulated to clients, analyst Marvin Fong flagged that the market appears to be treating the post-10-K allegations as highly consequential. BTIG pushed back, saying those central claims "are not well-founded" and that they form the basis for other assertions now being circulated.
BTIG focused its critique on several technical points raised by critics. One primary contention concerns how DriveTime's leverage has been calculated. Some analyses have suggested leverage in the range of 20 to 40 times. BTIG says that these figures stem from a misunderstanding of how securitized assets are presented on DriveTime's balance sheet. Because DriveTime’s Bridgecrest unit consolidates bankruptcy-remote trusts, BTIG argued that treating the securitizations as recourse debt is an incorrect approach.
When adjusted according to BTIG's interpretation, the firm calculated 2024 Adjusted EBITDA at $99 million versus $511 million of warehouse debt, a relationship it described as "much more manageable" than the extreme leverage ratios being claimed by critics.
BTIG also disputed a separate line of criticism concerning the servicing fee. The firm said that opponents understated receivables tied to Ally and Purchaser trusts, which led to an artificially low implied third-party servicing fee in those critiques. According to BTIG, properly accounting for those receivables changes the servicing-fee picture.
Another allegation addressed by BTIG involved an asserted loan write-down of around $900 million. The firm rejected this characterization, saying the logic behind the calculation is incorrect because year-end fair values reflect cumulative loan activity rather than the originations of a single year. Finally, BTIG dismissed attempts to use cash flow from operations as a stand-in for profit-and-loss metrics, noting that cash flow from operations is influenced by multiple items and therefore cannot be directly mapped to earnings.
After laying out these counterarguments, BTIG reaffirmed its Buy rating on Carvana and reiterated a $535 price target, adding that its estimates "are not under review at this time."
Summary
Carvana shares dropped amid newly public allegations tied to DriveTime's 2024 10-K. BTIG countered those allegations point by point, challenging the leverage, servicing fee, and loan write-down calculations, and maintained its Buy rating and $535 target on Carvana.
Key Points
- BTIG says the most serious allegations stemming from a FOIA release of DriveTime's 2024 10-K are not well-founded.
- The firm disputes alleged 20-40x leverage, arguing securitizations were mischaracterized as recourse debt; BTIG notes a 2024 Adjusted EBITDA of $99 million against $511 million of warehouse debt.
- BTIG rejects claims of a roughly $900 million loan write-down and says cash flow from operations should not be used as a direct proxy for earnings.
Risks and Uncertainties
- Ongoing market reaction - The stock experienced heavy pressure following the allegations; market sentiment could continue to affect Carvana's share price.
- Interpretation disputes - Disagreement over accounting treatment of securitizations and servicing calculations introduces uncertainty for stakeholders evaluating credit and operating metrics.
- Legal and disclosure context - The underlying documents were disclosed via a FOIA request tied to a class-action lawsuit, leaving open the potential for further legal or procedural developments tied to the disclosure process.