Carvana Co. (CVNA): A Bear Case Theory

We came across a bearish thesis on Carvana Co. on The Small Cap Strategist’s Substack by Strategist, Legal Special Situations, and Architect. In this article, we will summarize the bulls’ thesis on CVNA. Carvana Co.'s share price was $374.50 as of November 28th. CVNA’s trailing and forward P/E were 85.11 and 57.47 respectively according to Yahoo Finance.

Carvana Co., together with its subsidiaries, operates an e-commerce platform for buying and selling used cars in the United States. CVNA represents a textbook case of corporate fragility masked as growth, where short-term survival has been fueled by luck and financial engineering rather than sustainable operations.

The company’s reported profitability is largely illusory, driven by gains on loan sales that account for 93% of net income YTD 2025, while the underlying business of selling cars remains unprofitable. Carvana targets high-risk subprime borrowers, immediately offloading these loans to securitization markets, leaving the company exposed if credit conditions tighten.

Cash flow tells a starkly different story than the income statement: operating cash flow has declined $252 million YoY, inventory has surged 44%, and the company has raised $536 million via equity dilution to fund operations. The Garcia family, who control 84% of voting power, have aggressively sold billions in stock, highlighting severe agency risk and asymmetric incentives. Compounding these structural issues, Carvana carries over $5 billion in debt, much of it Payment-in-Kind notes, which inflate obligations while masking cash strain.

Legal and regulatory pressures intensify the risk: state regulators have repeatedly suspended licenses, securities litigation is entering discovery, and consumer class actions continue to mount, with cumulative exposure potentially reaching hundreds of millions. The company also holds a significant stake in ROOT, whose volatility may be used to inflate accounting gains artificially.

Taken together, Carvana’s model is a fragility engine transferring risk from insiders to shareholders, dependent on continued loan sale gains and favorable credit conditions. Even under optimistic assumptions, legal costs, debt servicing, and declining operational cash flow create asymmetric downside, making Carvana a terminal short with a fundamental risk profile that dramatically outweighs any perceived recovery or growth narrative.

Previously we covered a bullish thesis on Carvana Co. (CVNA) by Investing City in May 2025, which highlighted the company’s integrated platform, financing model, and cost efficiencies. The company's stock price has appreciated approximately by 16.91% since our coverage. The thesis still stands as Carvana’s digital scale and logistics network support long-term growth. The Small Cap Strategist shares a contrarian view but emphasizes structural fragility and regulatory risks.

Carvana Co. is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 91 hedge fund portfolios held CVNA at the end of the second quarter which was 90 in the previous quarter. While we acknowledge the potential of CVNA as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

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Disclosure: None.