What happened
Tuesday is looking great for car stocks, as news of a surprise earnings beat from CarMax lifted investor hopes for brighter days ahead for EV stocks Lucid Group (LCID 1.19%), Nio (NIO 3.49%), and Canoo (GOEV -8.52%) -- which were up 4.6%, 5.1%, and 6.2% respectively, as of 11:55 a.m. ET.
But investors appear to be reading CarMax's news all wrong.
So what
That's not to say CarMax's news today wasn't good. This morning, the used-car superstore announced an astonishing earnings beat, with earnings coming in at a strong $0.44 per share instead of the $0.24 that investors expected.
At first glance, this sounds like it could be good news for car demand -- and thus good news for automakers, including electric vehicle (EV) producers. But keep reading.
CarMax earned more than expected despite sales being only $5.7 billion (instead of the $6 billion that was expected, according to forecasts from The Fly). Management said it achieved "robust" profit margins largely through reducing costs by aligning marketing spend to sales, managing staff levels through attrition, and "limiting hiring and contractor utilization in our corporate offices."
And indeed, CarMax had to grow its profits by cutting its costs, because it had no other way to do that. As it turns out, unit sales declined 12.6% year over year in the fourth quarter, and revenue declined 25.6% year over year.
Now what
For that matter, part of the reason CarMax stock is outperforming today (and it is outperforming -- up 10.1%) is because management affirmed its long-term goals of growing combined retail and wholesale sales to more than 2 million by 2026, growing sales to more than $33 billion, and growing its market share from it current 4% to 5% by the end of 2025.
All of that sounds like great news for CarMax, but it's largely a function of growing its share of the used car market (benefiting the company at the expense of other car dealers), rather than the entire car market growing strongly, which would imply growth for automotive stocks in general.
As a result, investors betting that this used car dealer's good news implies strong future sales for automakers, and for makers of RVs in particular, may be making a mistake.
That's not to say that automotive sales won't grow strongly in future years. They very well might, and investments in Lucid, Nio, and Canoo could still end up paying off just as well as an investment in CarMax is paying off today.
But it does suggest that investors should be cautious about overreacting to today's news -- and especially cautious about putting too many eggs in the trunk with any investments in Canoo (which is still losing money at the rate of nearly $500 million a year), Lucid (with $1.3 billion in trailing-12-month losses), or Nio (which just lost $2.1 billion).
