Carvana Drops 14% After $1B Accounting Allegations

Carvana Co. (NYSE: CVNA) shares experienced extreme volatility in trading during the last days of January 2026. The stock dropped approximately 14%, trading near $408 per share and erasing a significant portion of its gains from earlier in the year. This sharp decline creates a confusing picture for investors because it came immediately after the company reported record-breaking third-quarter financial results.

The catalyst for this sell-off is a new report from short-selling firm Gotham City Research. The report alleges severe accounting irregularities and undisclosed financial dependencies between Carvana and its related corporate entities. This creates a classic battleground scenario for the stock. One side sees a company with rapidly improving fundamentals and cash flow, while the other sees complex accounting risks. Investors must now decide if this pullback represents a structural failure or a discounted buying opportunity.

Smoke and Mirrors? Analyzing the Accounting Claims

The core of the Gotham City Research report focuses on Carvana’s relationship with related companies controlled by the Garcia family. Ernest Garcia II, the father of Carvana CEO Ernest Garcia III, controls DriveTime Automotive Group and Bridgecrest. The report alleges that Carvana has overstated its earnings for the 2023 through 2024 period by more than $1 billion by using these entities to subsidize its operations.

A key part of this allegation involves a lesser-known entity called GoFi, LLC. Financial documents obtained for GoFi show that it generated nearly 100% of its revenue in 2024, specifically $7.1 million, from gains on the sale of finance receivables. This data point is critical to the short seller's argument. It suggests that GoFi may exist primarily to move loans and capital between corporate entities rather than to operate as a standalone business.

Furthermore, the report challenges the market's belief that DriveTime acts as a stable financial backstop for Carvana. DriveTime’s 2024 financial statements reveal a cash burn from operating activities of over $900 million between 2022 and 2024. Instead of generating surplus cash to support Carvana, DriveTime appears to be raising debt to fund its own operations.

The report also highlights discrepancies in loan valuations. Carvana generates profit by selling customer loans to third parties, known as Gain on Loan Sales. Gotham alleges that Carvana sells these loans to Bridgecrest at inflated values to book an immediate profit. Bridgecrest then allegedly marks down the value of those same assets by up to 15%, or by $900 million, in 2024. This process could effectively shift losses from Carvana’s public books to the private books of related parties.

Carvana refuted the allegations in an email statement, calling them “inaccurate and intentionally misleading.” The company also stated that all its “related-party transactions are accurately disclosed in our financial statements.”

Ignoring the Noise: Carvana’s Record Financials

Despite these serious allegations, Carvana's defense remains solid. The company's recent financial performance indicates it is in its strongest operational position ever. In its Q3 2025 earnings report, Carvana posted record revenue of $5.65 billion, a 55% increase year-over-year.

More importantly, the company achieved GAAP operating income of $552 million and Adjusted EBITDA of $637 million. This represents an 11.3% margin, a record for the company. These metrics suggest that the core business of buying and selling cars is generating real profit, regardless of the complex loan accounting.

The company has also significantly repaired its balance sheet, countering the bankruptcy fears that plagued it in previous years. Carvana ended the third quarter with strong liquidity metrics:

• Cash on Hand: Over $2.1 billion
• Debt Reduction: Retired approximately $1.2 billion in corporate debt over the last two years
• Leverage Ratio: Reduced to 1.5x, a level generally considered healthy for a growth company

Operational improvements are also visible to the consumer. The company has integrated the ADESA auction network it acquired in 2022. This integration has streamlined Carvana’s logistics in the retail automotive sector, enabling same-day or next-day delivery for 40% of sales in the Phoenix market. This physical efficiency is a tangible asset that critics cannot easily dispute.

The Smart Money Vote: Price Targets Head Higher

The reaction from Wall Street suggests that institutional investors are looking past the short-seller report. Immediately following the release of the Gotham report and the Q3 earnings, major analysts raised their price targets for Carvana stock.

JPMorgan maintained its Overweight rating and raised its price target to $510. Similarly, Wells Fargo raised its target to $525. These upgrades indicate that analysts view the related-party complexity as known noise.

They appear to be prioritizing the company’s visible ability to generate free cash flow and capture market share over the forensic accounting concerns raised by the short seller. When analysts raise price targets during a sell-off, it is often interpreted as a vote of confidence that the market reaction is exaggerated.

The Tail Risks: Auditors and Subpoenas

While the operational metrics are strong, significant risks remain. The Gotham report notes that Grant Thornton serves as the auditor for all three entities: Carvana, DriveTime, and GoFi. Critics argue this could represent a potential conflict of interest or a weakness in independent oversight, as the same firm is signing off on both sides of these related-party transactions.

Additionally, the report mentions an SEC subpoena from June 2025 regarding these exact issues. This is the biggest hard risk for investors. It moves the discussion from theoretical debates about accounting methods to potential legal consequences. If regulatory action forces a restatement of earnings or changes in business practices, the stock could face further pressure regardless of how many cars they sell.

Crisis or Opportunity? Weighing Risk Against Reward

Carvana remains a high-risk, high-reward investment. The stock trades at a high valuation multiple of over 90 times trailing earnings, which naturally invites high volatility. It is not a suitable holding for conservative investors who cannot stomach double-digit daily percentage moves.

However, for those with a higher tolerance for risk, the current drop presents a specific opportunity. The stock is trading in the $400 to $410 range, well below the recent 52-week high of $486 and the new analyst targets of over $500. If Carvana can clarify its accounting position regarding DriveTime and GoFi, and continue its operational growth into 2026, the market may quickly reprice the stock higher. The underlying retail machine is firing on all cylinders, but investors must be willing to weather the regulatory storm to capture the potential upside.

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The article "Carvana Drops 14% After $1B Accounting Allegations" first appeared on MarketBeat.