KMX

CarMax Inc

93.57
USD
-0.88%
93.57
USD
-0.88%
84.37 155.98
52 weeks
52 weeks

Mkt Cap 15.17B

Shares Out 162.11M

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Carvana’s crash keeps downside for Carmax in check

Carvana Co. (NYSE:CVNA) sustained struggle has set a floor for Carmax (KMX), according to analysts. Carvana (CVNA -11.0%) is leading eCommerce declines on Monday, falling double-digits in Monday afternoon trading. The sharp decline adds to deep drops in recent months, amounting to an over 90% decline for the stock from its 2021 highs. In just the past month shares have lost more than 60% of their value as management struggles to raise capital to shore up the business. Indeed, many formerly bullish analysts are now considering the potential depth of the downside for the stock amidst these troubles. For example, Morgan Stanley analyst Adam Jonas recently published a note highlighting the opacity of the stock’s trajectory. Noting an “extraordinarily wide dispersion of outcomes”, a bear case was cited as resulting in a $5 share price while a bull case could see shares reach $352. He highlighted operational challenges and financing issues as the most pressing problems. It is in this operational arena that many analysts have pinpointed a bifurcation between its business model and that of Carmax (KMX -2.2%). Per a recent Bloomberg analysis, Carvana (CVNA) lost an average of $3,255 per car sold in the first quarter. By comparison, Carmax (KMX) notched a $465 profit on each unit sold. As Carvana (CVNA) had sported a typically higher multiple than Carmax (KMX) as the projected winner amid pandemic auto-purchasing trends, its slide since revealing cash-burning trends has been quite steep. For Guggenheim analyst Ali Faghri, the bifurcation of the two stocks’ trends should cause investors to appreciate operational excellence at Carmax and come away from competition concerns. “With [Carvana’s] (CVNA) growth significantly slowing recently, a trend that will likely continue as the company enters cost-cutting mode to preserve liquidity, we believe investors now view [Carvana] (CVNA) as less of a near-term competitive threat to [Carmax] (KMX),” he wrote. “In fact, we believe CVNA's recent struggles, along with other digital competitors [ such as Vroom (VRM) and Shift Technologies (SFT)], have given investors a better appreciation for [Carmax’s] (KMX) business model/moat, omni-channel strategy, and market share outlook.” At the least, Faghri advised that downside is limited as the company executes well and its chief competitor’s business confronts existential questions. He advised an $80-$100 risk/reward range for shares. While Faghri remained “Neutral” rated on shares, the $20 range straddling the current share price is likely preferable to the downside potential for Carvana (CVNA) that analysts like Morgan Stanley’s Adam Jonas are now putting on paper. Indeed, even those defending bull theses on the stock have reined in targets significantly the path ahead for Carvana becomes increasingly cloudy.

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