CVNA has been largely a highly frustrating short, especially in light of the fact that it burned in excess of $600 million in cash in 2020. I think the high short interest (25% of the float on a float of just 68mm shares) is the catalyst for serial short squeezing. However, the founder and Chairman, former convicted felon Ernest Garcia II, has been unloading shares relentlessly on almost a daily basis this year. In March so far he’s dumped several hundred thousand shares. It’s shamelessly blatant.
The Company recently reported Q4/full year numbers. Sales increased by quite a bit as did the gross margin, which rose nearly 200 basis points. Yet, curiously, the pre-tax operating loss rose 27.5% to $462 million. Part of this was the cost of interest, which rose 63.8% from $80.6 million in 2019 to $131.5 million in 2020. At the end of Q4 the cash balance, which has been “replenished” with stock and debt offerings in the first half of 2020, was down to $300 million. At the current burn rate, it’s likely well under $200 million now, with means the Company will have to issue more debt or equity, or both before June.
This suggests either a poorly managed corporate operation or something unscrupulous is occurring. I’ve detailed in the past how Ernest Garcia II and his son, CEO Ernest Garcia III, are using off-balance-sheet related entities to suck cash out of the business. These are businesses owned by the Garcias that provide “services” like used car reconditioning, financial services etc. I’m not even sure a lot of the stock analysts that recommend the stock are aware of this. I had to spend a considerable amount of time digging through the footnotes to the financial statements in order to understand the extent to which the Garcia’s are fleecing the shareholders.
The Company is forced to issue new shares and debt constantly in order to fund the huge cash deficit generated by the operation. With the Garcia’s “related businesses” siphoning off $10’s of millions every year, this is nothing more than a thinly veiled Ponzi scheme. Morgan Stanley’s corrupted auto analyst, Adam Jonas, put out a strong buy recommendation on February 26th and raised his price target to $420 from $225. MS is CVNA’s primary investment banker so no doubt Jonas knows the Garcia’s are hollowing out CVNA’s cash. It also signaled the likelihood of a stock deal soon.
Ironically, CVNA’s stock price had just dropped below the 50 dma when Jonas issued his buy recommendation. Over the next three days the stock ran from $263 to $314. It then plunged down close to $240 after closing at $314. It’s bounced around with the Nasdaq since then but it’s lower than it was when the Jonas report hit the wires.
Chairman and founder Ernest Garcia II – convicted felon (was tied in with Charles Keating during the Keating-driven collapse of the S&L industry) and Ponzi scheme operator extraordinaire has been selling shares as if they are infected with Covid and malaria, including just before and after earnings were reported on February 25th (graphic from finviz.com, click to enlarge):
Note: CVNA filed for $500 million junk bond deal. This makes no sense because CVNA is unable to take advantage of the tax benefit from interest expense. Issuing debt instead of shares is disadvantageous for shareholders – except Garcia. Filing a $500 million stock deal would have trashed the stock price, which would reduce the net proceeds to Garcia from dumping shares relentlessly.
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