CarMax and Carvana: Steering the Used Car Market

March 27, 2025 at 10:45 AM EDT

keyboard, cars

The used car market is experiencing a period of dynamic change, with evolving consumer preferences, technological advancements, and economic factors shaping the fortunes of key players. CarMax (NYSE: KMX), a long-standing leader known for its brick-and-mortar presence and established brand, and Carvana (NYSE: CVNA), an online disruptor that has experienced dramatic recent volatility, exemplify these contrasting trajectories.

Carvana's stock has recently experienced the start of a solid rebound fueled by its latest earnings report, raising the question: Can CarMax replicate this success and potentially start a rebound of its own as it heads into its earnings call?

Carvana's Road to Recovery

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Carvana's recent performance hints at the start of a remarkable turnaround. Carvana’s earnings report for the fourth quarter of 2024 delivered impressive results, exceeding analysts' expectations and fueling a surge in Carvana’s stock price. Carvana’s revenue increased 46% to $3.54 billion, and total gross profit increased 90% to $763 million.

The numbers solidify a company with a plan to create value. Even more impressive, the firm reported a net income of $159 million and an adjusted EBITDA margin of 10.1% or $359 million, signaling a shift toward profitability.

Market analysts have noticed this financial resurgence. Multiple analysts are re-evaluating and upgrading their positions on Carvana. They project the stock to rise into the consensus range of $260 - $265, providing a healthy upside to its current price.

Several key strategies are driving Carvana's recovery. Its improving logistics network appears to be key to its improved figures. The deepening integration of Carvana and ADESA, allowing for more efficient operations, seems to be another reason for improved performance.

Cost-cutting initiatives, debt restructuring, and a renewed focus on profitability have bolstered the company's financial position. Moreover, Carvana has made progress in streamlining and customer experience by leveraging artificial intelligence (AI) powered customer service tools, lowering overhead.

Can CarMax Catch Up?

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As Carvana celebrates its recent success, CarMax is preparing for its fourth-quarter earnings call on April 10, 2025. With the used car market undergoing significant changes, investors are keenly watching to see if the established retailer can replicate Carvana's positive momentum. While CarMax remains a dominant player in the used car market, it faces distinct challenges.

Analysts maintain an average rating of Hold and an average price target of $90.45, providing a similar upside percentage to Carvana.

CarMax has been actively pursuing a strategy to compete in today's market. They have been active with the integration of its online and offline experiences with what they are calling "omnichannel initiatives". The company’s omnichannel approach focuses on driving customer experience, particularly for the younger customer demographic that wants to be able to shop for and finance vehicles remotely and also take delivery on their terms.

Contrasting Approaches, Diverging Paths

The contrasting fortunes of CarMax and Carvana can be attributed, in part, to their fundamentally different business models. CarMax operates primarily through physical locations, offering a hands-on, customer service-oriented experience. While this model provides a sense of trust and reliability, it also entails higher overhead costs and limitations in scalability. On the other hand, Carvana has built its brand around a fully online experience, emphasizing convenience and efficiency.

The companies' financial health is also vastly different. CarMax has a long profitability history, giving it a stronger balance sheet and more financial flexibility. Carvana's financial situation has improved due to its turnaround; however, it still has a leveraged balance sheet, which could mean a higher risk for a higher reward.

Their growth strategies also diverge considerably. Carvana initially prioritized rapid expansion, aiming to capture market share through aggressive pricing and widespread availability. CarMax is now focused on sustainable profitability and adapting its existing infrastructure to evolving consumer preferences. These strategies highlight the dichotomy between growing faster and growing sustainably, and the market is reacting to whether sustainable growth is the better plan.

The potential for tariffs in the used car market adds a layer of complexity. Analysts have noted that "tariffs do pose a wildcard for Carvana, Carmax, and the used car industry." New car prices could increase, incentivizing customers to explore used vehicles. However, the market can shift at any time, and what now appears to be true may not be as the situation evolves.

Cautionary Tale or Comparative Opportunity?

Carvana and CarMax present different opportunities and risks for investors. Carvana, with more analyst attention and a potential for high growth and market share gains, is a riskier but potentially more rewarding option. Its leveraged balance sheet and need for sustained operational improvements are major risk factors. CarMax, on the other hand, offers stability and consistent profitability through its established business model and commitment to shareholder returns.

The future success of both companies depends on their ability to adapt to the changing used car market and execute their strategies effectively. Each company has a unique value proposition and serves different customer segments. The evolving market presents risks and opportunities; only time will tell which company will come out on top.

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