Why is Carvana Stock Dropping : A 2026 Market Analysis

Earnings Miss Expectations

The primary driver behind the recent decline in Carvana (CVNA) stock is the company's mixed fourth-quarter financial results for 2025, which were released on February 18, 2026. While the company reported a significant jump in revenue, key profitability metrics failed to meet the targets set by Wall Street analysts. Specifically, the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) came in at $511 million, falling short of the $535.7 million that investors had anticipated. This discrepancy signaled to the market that despite high sales volume, the company's operational efficiency or cost management might not be scaling as profitably as hoped.

Furthermore, the adjusted EBITDA margin was reported at 10.1%, missing the estimated 10.4%. In the high-growth e-commerce automotive sector, even minor misses in margin percentages can lead to sharp sell-offs, as they suggest a tightening of the spread between vehicle acquisition costs and final sale prices. Investors often view these margins as a litmus test for the long-term sustainability of the business model.

Vague Forward Guidance

Market participants generally react poorly to uncertainty, and Carvana’s latest shareholder letter provided what many considered to be a vague outlook for the immediate future. CEO Ernie Garcia III stated that the company expects "significant growth" in retail units sold and adjusted EBITDA for the full year 2026. However, the company declined to provide specific numerical forecasts for the first quarter of 2026. This lack of concrete data left a vacuum that investors filled with caution.

Wall Street had already baked high expectations into the stock price, with analysts looking for a Q1 2026 adjusted EBITDA estimate of approximately $671 million and retail unit sales of over 175,000. Without management confirming these specific targets or providing a clear bridge to reach them, the stock experienced a "valuation reset," dropping over 20% in after-hours trading following the announcement. The absence of a detailed roadmap for the next three months made it difficult for institutional investors to justify maintaining current price levels.

Accounting and Fraud Allegations

Beyond the immediate earnings figures, Carvana is grappling with significant scrutiny regarding its accounting practices and corporate relationships. In early 2026, short-seller Gotham City Research released a report alleging that Carvana had overstated its earnings. The core of the allegation involves the company’s relationship with DriveTime, a used-car retailer and subprime lender controlled by Ernie Garcia II, the father of Carvana’s current CEO.

The allegations suggest that Carvana may not have fully disclosed the extent of the benefits and financial support it receives from these affiliated entities. This has led to concerns about "financial transparency" and whether the company’s reported profitability is an accurate reflection of its independent operations. When a company’s accounting integrity is questioned, risk premiums rise, and many conservative investors choose to exit their positions until a third-party audit or regulatory body clears the air. This "trust deficit" has been a heavy weight on the stock price throughout the first two months of 2026.

Market Sentiment and Volatility

Carvana has historically been one of the most volatile stocks in the retail sector. After a massive surge during the pandemic years and a subsequent collapse in 2022, the stock had been on a "comeback narrative" through 2024 and 2025. However, as of February 2026, that narrative is being tested by macroeconomic pressures and internal legal challenges. The stock had already seen a 25% slide over the month leading up to the earnings report, indicating that bearish sentiment was building even before the official numbers were released.

Comparison of Key Metrics

To understand why the stock reacted so violently, it is helpful to compare the actual reported figures against the consensus estimates that were driving the stock's valuation prior to the drop.

Metric (Q4 2025)	Analyst Estimate	Actual Reported	Status
Adjusted EBITDA	$535.7 Million	$511 Million	Miss
EBITDA Margin	10.4%	10.1%	Miss
Retail Units Sold	~165,000	163,522	Slight Miss
Full Year Revenue	$19.8 Billion	$20.3 Billion	Beat

Impact of Financing Costs

Carvana’s business model is deeply integrated with auto financing. The company does not just sell cars; it facilitates loans and packages them for sale to investors. In the current 2026 economic environment, interest rate fluctuations continue to impact the subprime and near-prime lending markets. Because Carvana relies on its relationship with Bridgecrest (another Garcia-controlled entity) for loan servicing, any perceived instability in the credit markets or the financial health of their lending partners directly impacts Carvana’s stock.

Investors are currently worried that if the used-car market cools down or if loan default rates rise among subprime borrowers, Carvana’s ability to generate "Other Material Margin" (the profit made from financing and ancillary products) will diminish. This specific revenue stream is often more profitable than the actual sale of the vehicle hardware, making it a critical component of the company's path to net profitability.

Future Outlook and Risks

While the stock is currently dropping, some analysts remain optimistic about the long-term potential of the e-commerce auto model. Projections suggest that if Carvana can normalize its profitability and clear the cloud of accounting scrutiny, the stock could see a recovery by late 2027. However, the immediate hurdles are high. The company must prove to the SEC and its shareholders that its dealings with DriveTime are at arm's length and that its growth is sustainable without constant capital infusions.

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Institutional Investor Skepticism

The 21% plunge in after-hours trading following the February 18 announcement suggests that institutional "long" holders are losing patience. Large hedge funds and asset managers often have strict risk-management protocols. When a company misses on profit metrics and simultaneously faces fraud allegations, it often triggers automatic sell orders. The "brutal month" mentioned by market observers, where shares fell over 25% since mid-January, indicates a broader rotation out of high-beta growth stocks as investors seek safety in more transparent, predictable earnings stories.

The current P/E ratio for Carvana remains significantly above the historical median for the automotive retail industry, sitting at approximately 82.81. This high valuation leaves very little room for error. When the company fails to "crush" expectations, the premium valuation is quickly stripped away by the market, leading to the rapid price drops observed recently.