What happened
Shares of online car sales companies CarMax (KMX -0.91%), CarGurus (CARG 1.51%), and Copart (CPRT -1.52%) rose in May, according to data from S&P Global Market Intelligence. Copart's shares rose by 11.6%, while CarGurus' stock was up 13.5%. CarMax, the big winner of the bunch, saw its shares jump an impressive 19.6%.
All three companies handily beat the S&P 500's monthly gain of just 4.5%.
Image source: Getty Images.
So what
As you'd expect, much of the companies' gains were due to the gradual reopening of the U.S. economy, which began in earnest in the second half of May. While CarMax and CarGurus have made it easy to shop for a car -- or at least to begin the process of shopping for a car -- from the comfort of your home, it's still unlikely you're going to actually buy a car if you know you're not going to need one for a while.
Meanwhile, Copart, which allows salvage yards, parts suppliers, and insurance companies to buy and sell salvage vehicles over the internet through its online platform, was expected to see a decline in business as fewer drivers on the road led to fewer auto accidents, reducing both the number of vehicles entering the salvage market and demand for after-market parts from those vehicles.
In April, overall auto sales fell by more than 50%, but all three of these companies saw their shares rise that month as well. In fact, each company performed better in April 2020 than it did in May 2020:
That was due to the perception of the companies' online selling platforms as more reliable during the coronavirus crisis than traditional in-person dealerships. As drivers gradually began returning to the roads in May, Wall Street expected the companies would see even more traffic (no pun intended) on their platforms and subsequently bid up shares even further. A swift recovery in China's auto market after its reopening also played into investors' high hopes.
It certainly didn't hurt that CarGurus was coming off a steep plunge in February after releasing disappointing 2020 guidance, giving it more room to recover in April. On May 7, the company reported a 17% year-over-year revenue increase in Q1 2020, coupled with a 58.3% increase in adjusted earnings per share, plus cost-cutting measures that included trimming executive salaries by 50%.
CarMax also put out a solid Q1 2020 earnings report in April and implemented cost-cutting measures of its own, including cutting CEO Bill Nash's salary by 50% and furloughing 15,500 workers, which may have reassured investors that it, too, would be able to weather the downturn successfully.
Now what
The economy seems to be showing signs of recovery, but it's still in a fragile position. A second wave of COVID-19 infections, a surprise uptick in unemployment numbers, or any number of other surprises could send the U.S. economy back into a tailspin, taking the auto market with it.
For those who are convinced that the worst is behind us, it may be worth taking a closer look at these online car companies, which are continuing to disrupt the traditional dealership model. However, most investors will want to see clearer signs that the cyclical auto market has turned the corner before buying in.
