With Carvana in the Lead, Is CarMax Doomed?

If we asked you to pick a racehorse based on the chart below, the decision would be pretty simple…

Carvana (CVNA) seems to have found a magic efficiency switch, powered by artificial intelligence (AI) and technology that is placing it squarely above its most recognized competition: CarMax (KMX).

Simply put, the vehicle vending machine up-and-comer Carvana is eating its much more established used-vehicle peer’s lunch.

We can actually see the shift occurring in the minds of consumers in real time on this chart, showcasing digital traffic for Carvana and CarMax over the last three years:

To be fair, if you look at the stock trajectory for CVNA versus KMX, these charts shouldn’t surprise you.

KMX is trading ~10% lower from six months ago; CVNA stock has nearly doubled in the same time frame.

With tilted expectations and a somewhat improving macro picture for consumers, thanks to Federal Reserve rate cuts, are we willing to take a bet on KMX to the upside?

Not yet. Here’s why.

CarMax Still Has a Lot to Prove

Sure, the recent Federal Reserve rate cut could offer a glimmer of hope for the company.

The Fed’s 50 basis point rate cut in September 2024, the first in four years, is part of a broader easing cycle aimed at boosting borrowing affordability. For the auto sector, this rate cut is expected to gradually bring down auto loan rates, which could improve consumer affordability in the used car market.

But it’s important to note that the impact on auto loan rates will likely be delayed, with more significant benefits expected in 2025 as additional cuts are anticipated.

From a trader’s perspective, this Fed action could eventually help CarMax improve its margins by lowering financing costs for buyers, but short-term impacts will remain limited. With affordability still a major issue for consumers, especially given high vehicle prices and persistent inflationary pressures on maintenance and insurance, CarMax’s stock could continue to struggle in the near term.

In addition, the company’s foray into non-prime lending isn’t without risk.

CarMax Auto Finance (CAF), the in-house lending division of CarMax, provides financing for customers purchasing vehicles through CarMax. CAF offers various loan options, including loans for customers across the credit spectrum, from prime to non-prime borrowers.

The division is a significant contributor to CarMax’s overall profitability, generating revenue from interest payments on auto loans. In recent quarters, CAF has expanded its capabilities to serve more subprime borrowers through initiatives like non-prime securitization deals, which help diversify its loan portfolio and drive additional finance income.

While non-prime lending allows CarMax to diversify its customer base, the company acknowledges the credit risks involved, particularly with lower credit tier customers.

Bottom line: CarMax needs to prove it can conquer these challenges while waiting for the full effects of the rate cuts to materialize.

Meanwhile, Carvana is racing ahead, increasing its lead over the competition. If you had to pick one used car retailer to bet on, the choice is clear. Go with Carvana.

Until next time,

Andy Swan
Founder, LikeFolio

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