Carvana (CVNA -2.59%) and CarMax (KMX -1.84%) are both used car retailers that set firm prices and simplify the buying process. Carvana sells all of its cars online, and customers can either have their vehicles delivered or pick them up at one of its 33 "vending machine" towers across America. Carmax has a much larger brick-and-mortar footprint, with 240 used car stores across the U.S. It also operates an online marketplace, which streamlines the process with deliveries and in-store pick-ups.
Carvana and CarMax both benefited from the post-pandemic surge in used car sales in 2021, but they struggled in 2022 as inflation and rising interest rates drove away potential buyers. As a result, the vehicle shortage turned into a surplus, used car prices plunged, and share prices of Carvana and Carmax plummeted 97% and 53% from their all-time highs, respectively.
But could either of these out-of-favor used-car retailers be worth buying as a turnaround play before a new bull market starts?
Image source: Getty Images.
The key differences between Carvana and CarMax
Carvana was founded only 11 years ago. CarMax was founded in 1993 as a subsidiary of Circuit City, and it was spun off as an independent company in 2002.
Carvana was built from the ground up to be an online-only retailer that enables customers to "get the car without the car salesman." The bulls claimed that this simple approach, along with its attention-grabbing vehicle vending machines, could make it the "Amazon of used vehicles" and disrupt traditional dealerships. It expanded that ecosystem by buying the vehicle auction platform Adesa U.S. last year.
As a subsidiary of Circuit City, CarMax was developed with the same focus on firm pricing, guaranteed quality, and a streamlined customer experience as its parent company's consumer electronics stores. CarMax initially sold both used and new cars, but it completely exited the new vehicle market over the past few years to become the largest used car retailer in the United States. It also acquired the online vehicle guide Edmunds in 2021 to attract more potential buyers.
Which company has a brighter future?
Carvana sold 412,296 used vehicles in 2022, which marked a 3% decline from 2021 and a severe slowdown from its 74% growth in 2021. CarMax's combined sales of used and wholesale vehicles fell 15% to 1.39 million vehicles in fiscal 2023 (ended Feb. 28), which also represented a significant deceleration from its 38% growth in fiscal 2022.
Analysts expect Carvana's revenue to drop 16% to $11.4 billion this year as it remains deeply unprofitable. That's troubling, since it was still shouldering $6.8 billion in long-term debt at the end of 2022 with only $434 million in cash and equivalents. Carvana is trying to restructure that debt, but it could still run out of cash in the near future.
Analysts expect CarMax's revenue to decline 6% to $28 billion in fiscal 2024, and for its earnings per share (EPS) to drop 7%. But unlike Carvana, CarMax has been firmly profitable for years -- and it only held $2 billion in long-term debt alongside its $315 million in cash and equivalents on its balance sheet at the end of fiscal 2023. That financial stability could give it a better shot at weathering the near-term headwinds than Carvana.
The valuations and verdict
With an enterprise value of $9.3 billion, Carvana might seem like the cheaper bet at just 0.8 times this year's sales. But it could continue to trade at that discount until its sales rise, it significantly narrows its losses, and it reduces its leverage.
CarMax's enterprise value of $28.3 billion values it at about 1 time this year's sales, but it isn't a screaming bargain at 25 times forward earnings. It's pricier than Carvana because it doesn't face the risk of a near-term bankruptcy, but it also won't attract more bulls until the macro headwinds dissipate and used car sales start rising again.
I wouldn't rush to buy either of these stocks right now. But if I had to choose one over the other, I'd pick CarMax because it's the safer long-term play. Carvana isn't down for the count yet, but it's still too speculative for my tastes right now.
