George Soros Is Betting on Carvana Stock. That’s a Mistake.

Stocks to sell

Should you invest in used-car retailer Carvana (NYSE:CVNA) because a famous fund manager did? It’s fine to follow the trades of financial “whales,” but Carvana is a troubled business. After learning about the company’s financial and legal woes, you’ll probably choose to avoid CVNA stock.

Carvana’s long-term shareholders have watched the value of their investment plummet since August 2021. Meanwhile, meme-stock traders have targeted Carvana for short squeezes from time to time.

However, sensible investors should consider whether Carvana can overcome its challenges during a time of elevated inflation and recession fears. As we’ll discover, at least one well-known billionaire took a share position in Carvana, but this doesn’t mean you have to jump into the trade now.

George Soros Bets on CVNA Stock

It’s not entirely accurate to say that Soros Fund Management CEO George Soros bought CVNA stock shares. Rather, Soros reportedly acquired call options that give him the right to purchase 1.5 million Carvana shares under specified conditions.

Those call options were worth $7.1 million as of Dec. 31, 2022. So, Soros apparently made a big bet on Carvana. Maybe he’s expecting a positive surprise from Carvana’s Feb. 23 earnings report. Or, perhaps Soros is bullish on Carvana because used-vehicle prices rose recently.

On the other hand, it seems that Soros placed the large-scale options trade before Carvana announced its so-called “Tax Asset Preservation Plan,” which is really just a poison pill strategy to avert a hostile takeover. Financially firm businesses don’t typically adopt this type of strategy, and it’s also a bad sign that Carvana is laying off around 8% of the company’s staff.

Carvana Has Financial and Regulatory Problems

It’s no secret that Carvana has shrinking revenue and a widening net earnings loss. This is undoubtedly one of the main reasons CVNA stock has lost so much value despite short-term meme-trader pumps.

Along with Carvana’s financial troubles, the company also has encountered legal/regulatory issues. Last year, according to Barron’s, a lawsuit was filed in Pennsylvania alleging that some of Carvana’s “customers went years without being able to legally drive vehicles they paid for.”

Then, in January of this year, Carvana “admitted to multiple violations of Michigan’s motor vehicle code in a plea agreement.” That same month, Carvana “reached a settlement with Illinois over delays in transferring vehicle ownership to customers and its misuse of temporary license plates.” That settlement requires Carvana to admit that it broke Illinois state law and pay a $250,000 bond.

Carvana isn’t out of the woods yet, though. Reportedly, a bill proposing regulations on out-of-state online vehicle dealers (such as Carvana) is heading to Colorado Governor Jared Polis’ desk. And perhaps worst of all, a civil complaint filed in Arizona alleges that Carvana engaged in a pump-and-dump scheme, causing two pension funds to sustain financial losses.

It’s a Mistake to Buy CVNA Stock Now

As you can see, there’s a lot going on with Carvana now. Most of it doesn’t bode well for the company.

For what it’s worth, Soros is a wealthy and successful investor. His position in Carvana (via derivatives) suggests that he’s probably optimistic about the company’s prospects.

However, you have to decide what to do with your hard-earned capital. Given Carvana’s suboptimal financial condition and slew of legal problems, I’d say it’s a mistake for Soros or anyone else to bet on CVNA stock.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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