Selling Cars From Vending Machines Makes Father and Son Billionaires

(Bloomberg) -- Everyone hates used-car salesmen.

Everyone except maybe shareholders of Carvana Co., the online upstart that sells cars out of vending machines.

Despite years of losses -- and forecasts of even more red ink ahead -- shares of the Tempe, Arizona-based company have headed upward this year. After falling as much as 57 percent in late 2018, the stock has doubled.

The rebound has drawn scrutiny from Carvana’s skeptics. On paper, though, it’s restored the fortunes of the company’s father-and-son team, the Garcias.

Ernest Garcia II and Ernest Garcia III are now worth a combined $6.7 billion, according to the Bloomberg Billionaires Index. That’s more than Dallas Cowboys owner Jerry Jones, movie mogul Steven Spielberg or hedge fund manager John Paulson.

Vending Machines

According to its website, Carvana lets customers choose from more than 15,000 cars and complete purchases in as little as 10 minutes. Buyers have the option of picking up their car at more than a dozen vending machines located around the country.

It’s been a marketing boon. Revenue has doubled in each of the last four years.

“I find it difficult to see why anybody in 10 years would buy a car in a different way,” said Clifford Sosin, founder of CAS Investment Partners, which owns about 2 percent of Carvana. “If Carvana works out as well as it could, they might be among the richest people on the planet.”

Two years ago this month, the Garcias climbed the dais above the floor of the New York Stock Exchange to ring the opening bell as Carvana went public on the Big Board.

Subprime Loans

It was a remarkable moment for the elder Garcia, who’d been convicted of fraud in 1990 for a small role in the Charles Keating savings-and-loan scandal. He avoided prison by testifying against Keating, received three years of probation and has since had his civil rights restored, according to regulatory filings. He went on to make a fortune selling used cars and providing auto loans to subprime customers via his company, DriveTime Automotive Group Inc.

Selling Cars From Vending Machines Makes Father and Son Billionaires

Carvana, billed as the Amazon of used cars, captured investors’ imaginations. By September 2018, it had shot to a record high of $70.82. Then, gravity took hold: the company’s losses kept piling up, and its shares tanked, falling to about $30 in mid-December.

Today, the stock has nearly erased the loss, fetching $66 on Friday. Since its initial offering, it’s soared more than four-fold.

Some investors doubt Carvana can keep up the pace. Short sellers have borrowed more than half the company’s publicly traded shares. That makes Carvana one of the Russell 3000 Index’s most-shorted security.

Carvana declined to comment. Ernest Garcia II didn’t respond to a request for comment.

Selling Cars From Vending Machines Makes Father and Son Billionaires

Carvana’s losses have attracted short sellers. So has the company’s other business -- originating and selling auto loans, some of them made to car buyers with limited or bad credit histories. Critics say they want to know more about who’s buying the loans.

Loan Purchasers

One buyer has been Delaware Life. The insurance company is controlled and part-owned by Mark Walter, chief executive officer of Guggenheim Partners, an investment and advisory firm. A Delaware Life spokesperson said the firm last bought Carvana receivables in 2016. Delaware Life, through a subsidiary, also owns about 9 percent of Carvana, securities filings show.

Less is known about other purchasers. Since at least 2017, some of Carvana’s loans have been sold through an entity called Sonoran Auto Receivables Trust. About three-quarters of the funding for the trust has come from Ally Financial Inc., the Detroit-based successor to GMAC, according to Carvana. The company doesn’t disclose who financed the rest.

Earlier this month, Carvana turned to a new source of financing, selling $350 million worth of its auto loans in what it called its first asset-backed securitization.

Carvana shares fell 3.4 percent to $63.76 as of 10:50 a.m. in New York on Monday.

©2019 Bloomberg L.P.