Rising used car prices pushed up its share prices by August. Since then the companies have seen their shares fall as they were having trouble getting enough vehicles to sell. again on wednesday General Motors (ticker: GM) announced its plan to sell used cars online in direct competition, sending the stock prices of used-car companies a little further down.
Carvana shares have fallen 55% since August while CarMax shares have fallen 24% since November. On Thursday, the Carvana slipped 8% to $163 and the CarMax slipped 1.5% to $117.49.
But many Wall Street analysts say investors have overreacted to Carvana’s and CarMax’s travails and that at their current share prices, the used car companies represent attractive buys.
Nowadays everyone wants to buy a used car. Rising prices of the famous cream puff pushed inflation to its highest level in decades. As my own car nears the end of its lease, we have been inundated with calls from dealers desperate to bring it to their lot.
This love for pre-loved vehicles arose from a combination of semiconductor-hungry new car shortages and the need for cheap rides by the pandemic unemployed. It was a double-edged sword for Carvana and CarMax. The shortfall given to his gross margin took away his unit sales.
GM expects to debut its online used car, the CarBravo, in the spring. The service will provide an expanded supply and outlet for used cars to participating local dealers. This can deduct independent sellers like CarMax and Carvana from used cars available at auction.
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JP Morgan analyst Rajat Gupta believes the two used car sellers are already a step ahead, and are buying into CarMax. “Carvana and CarMax have already shifted a lot of their sourcing from auctions to direct sourcing from consumers,” Gupta told me. “So I didn’t expect it to have a negative effect.”
CarMax also seems to have made the jump on GM. “What they have decided to do is difficult,” said Jim Liskey, CarMax’s head of marketing, in a written statement. “They will need to build capabilities to deliver seamless online in-store experience as customer demands, and do so across all of their dealers.”
Needham analyst Chris Pearce said GM is unlikely to be the last car company in the used car business. “I’m sure every manufacturer online will follow GM,” he told me. “The whole food chain is going digital.”
The Needham analyst is maintaining his buy rating on Carvana as its price recently plunged from a high of $376 last summer to $163, a 15% drop from Tuesday.
Pierce believes that as the economy recovers from the pandemic with an increasing supply of new cars, the price of used cars will drop back down to earth. Carvana will open several new inspection and renovation centers this year. Those developments should support used car demand. So should tax refund season arrive.
The Needham analyst believes Carvana’s sales will outperform Wall Street’s consensus forecast, with the company selling 38% in 2022 and then 25% in 2023, with sales of $21.6 billion and operations of $820 million. With cash income. He bets that Carvana stock can recover up to $378.
For its part, Carvana believes it will work out just fine. A spokesperson said the company is the “leader in online car buying and the fastest retailer to sell one million vehicles online.” “Our focus has always been and remains on our customers.”
JP Morgan’s Gupta dropped its Carvana rating from overweight to neutral in June, when the stock stood at $313. In December, he upgraded the CarMax to overweight. The analyst expects CarMax’s $117 share to rise to $160 as rising unit sales rise from the Covid-gloomy level of $4.52 per share in the fiscal year ended February 2021 to $7.66 in this fiscal and February $8.25 per share by 2024. ,
Gupta says that now the biggest hurdle affecting the sellers of used cars is the shortage of workers. When the pandemic subsides and people return to work — and new car inventory is replenished — they think sales volume for CarMax and other used car sellers will increase.
The JP Morgan analyst said the opportunity should not be lost even with the arrival of GM. “The used vehicle market is a huge market and very fragmented in nature,” Gupta said. “So I don’t think it will get in the way of growth opportunities for CarMax or Carvana.”
And I was in a hurry to get the best offer for my off-lease car.
Write to Bill Alpert at [email protected]