What happened
Shares of used-car e-commerce company Carvana (CVNA 2.88%) crashed on Thursday morning. The broader market was down sharply and that was certainly impacting Carvana stock. However, its rival CarMax (KMX -0.91%) reported its quarterly results and offered up some commentary that could be bad news for Carvana, too. As of 12:01 p.m. ET, Carvana stock was down 18.5%.
So what
First, let's recognize that Carvana is a volatile stock to begin with. Volatility can be measured with a metric called beta. A beta of 1 indicates that a particular stock's movements are correlated with and match those of the market as a whole. However, Carvana's beta is 2.6, according to Yahoo Finance, meaning shareholders can expect larger moves up and down on any given day.
On Thursday, Carvana stock was also reacting to the news from CarMax. In its fiscal 2023 second quarter, which ended Aug. 31, CarMax sold 376,616 vehicles, down 10.3% year over year. It seems higher interest rates are cutting into consumer demand for vehicles. That's bad news for any used-car dealer, including Carvana.
Now what
If there's a silver lining in CarMax's report, it is that it increased its gross profit per vehicle by boosting its average vehicle sales price. This is noteworthy because used-car prices have been dropping dramatically in recent months. If Carvana can command similar pricing power in a slumping market, it could actually be good news for shareholders. Much of its current inventory was acquired at higher-than-normal prices; if it had to cut its sale prices to reflect weaker market conditions, that would cause its gross profit margin to fall.
In time, these fluctuations in used-car prices will work themselves out. CarMax's drop in sales gives Carvana investors reason for concern. However, the fact that it was also able to avoid sacrificing its profit margins during this time gives them reason for optimism.
