CarMax Vs Carvana Stock: Which Is Best?

CarMax, Inc (NYSE:KMX) spun off from Circuit City to become the largest used-car retailer in the country. It’s part of the S&P 500 and a Fortune 500 company that revolutionized the way used cars are sold. But it’s being disrupted itself by a new competitor in Carvana Co (NYSE:CVNA).

So, which is the better investment between CarMax vs Carvana stock?

Carvana developed a car vending machine in select cities like its hometown of Tempe, Arizona. The company promises to change the way we buy a used car, removing the stigma associated with human used car salesmen.

By 2018, the company was the fastest-growing used car dealer in the United States. It continued innovating through the pandemic with vehicle pickup and delivery. This no-hassle platform is a complete disruption to a long-standing industry where buyers suffer to the whims of sometimes unscrupulous dealers.

But CarMax has a large retail footprint, giving people the opportunity to test drive cars in person before buying. This is a crucial trust element of the used car marketplace that Carvana can’t yet do without succumbing to the big expense of expanding its operations or using a fleet of tow truck drivers.

Which of these two companies is the future of used car sales?

Is Carvana A Good Buy?

Carvana was founded in 2012 with funding from DriveTime, a long-time used car retailer and financier. By the next year, the company had its first vending machine in Nashville, Tennessee. These futuristic machines let customers browse a wide selection of used cars, trucks, and other consumer vehicles in a coin-operated model.

It’s a new online used car business model that’s vertically integrated to offer financing, shopping, buying, and selling. The company’s registered tagline is “The new way to buy a car.”

Soon, the company expanded to offer next-day delivery of its expansive inventory of used cars. By 2019, the company sold 177,549 vehicles and generated $3.94 billion in revenue.

Carvana had a market capitalization of over $50 billion by Q1 2021. CVNA share price fell to a 52-week low of $29.35 during the stock market crash of 2020, but price levels and trading volumes quickly recovered. In fact, the move towards online from offline facilitated an ideal environment for the company to thrive.

The company’s 2020 third quarter revenue grew 41 percent from the same quarter in the prior year. Revenue of $1.544 billion for the quarter lead to $261.3 million in profits, a 90 percent year-over-year increase.

It says its secret sauce is removing hidden fees notoriously stuck into auto loan contracts by dealers. But does the stock have hidden risks?

Carvana Stock In Danger Of Changing Buyer Habits?

The pandemic changed the way we buy cars, but not just through Carvana. People are holding their vehicles longer and more likely to buy used, as unemployment rises and other economic conditions persist.

Carvana buys a lot of vehicles from its customers – there was a 128 percent increase in vehicles bought. If it doesn’t find ways to sell those vehicles, it could end up with a lot of excess inventory on the books.

This includes delivery and other operational costs that the company spends. And like Uber (UBER), the company is still not profitable. Building out its geographic footprint cost a lot of money, but those costs could pay off in the long run for investors willing to wait.

Others may be more inclined to look at CarMax.

Is CarMax a Good Investment?

CarMax is a traditional car retailer with a large brick-and-mortar footprint. These stores outlasted the Circuit City retailer that spawned them because they revolutionized used car sales at the time.

In the late 1990s, it was easier to revolutionize the car buying process. The company did so with a 125-point inspection and 90-day warranty that built brand trust among consumers.

The company is the Walmart of used car sales, with superstores that provide a full suite of services, from sales to repair. This gives it added value for each used vehicle sold.

Third quarter FY2021 net earnings grew 35.9 percent year over year. Gross profit of $631.4 million is a 2.9 percent increase from the same period in the prior year. Wholesale vehicle profit per vehicle was down, but overall was up.

Financing income was a big piece of the company’s earnings, and that brings up the inherent risks of investing in used car companies, no matter how big.

CarMax Footprint Is A Competitive Advantage & Risk

CarMax has an expensive real estate footprint, and it has a huge staff to pay. That includes loan financing, which could default and create more need for collections.

As the economy gets worse, it’s possible more people will default on car loans. This could create a problem where CarMax has to pullback many of the cars it sold. Of course, if the foreclosure and sub-prime mortgage crisis taught us anything, that could be profitable.

Like Carvana, the company could end up with a glut of product and has a large inventory. The shift to electric vehicles could even bring this process in-house for more companies than Tesla.

These changing market conditions and the arrival of a new disruptive competitor may limit future potential growth.

CarMax vs Carvana Stock: Which Is Best?

CarMax and Carvana are two disruptive used car sales companies with different routes to the goal. Each has in-house financing and a large reach across the country. One is mostly online, while the other is offline. This could be a key battleground of the retail wars.

Not only are these companies competing with each other, but there are the car manufacturers and newcomers like Shift Technologies. Each could take a giant bite out of the potential market share.

Still, if they make the right moves and market trends go there way, each is positioned for exponential growth moving forward.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.