KMX or CVNA: Is the Value Play Better Than the Growth Stock Now?

Industry Overview - Rising affordability pressures are reshaping the U.S. auto market, leading to a decline in new-vehicle sales year over year due to higher prices and borrowing costs [1] - Consumers are expected to shift towards the used-vehicle market for more affordable options, creating opportunities for companies in this sector [1] Company Comparisons - CarMax (KMX) and Carvana (CVNA) are two prominent players in the used vehicle industry, with differing business models; CarMax operates a nationwide store network with both physical and digital sales, while Carvana is a pure online player known for its digital-first experience [2] - Over the past year, CarMax shares have fallen approximately 42%, while Carvana's stock has surged around 78%, indicating contrasting market rewards [3][8] - Valuations differ significantly, with Carvana trading at a forward sales multiple of about 2.46x compared to CarMax's 0.23x [4][8] CarMax Analysis - CarMax is the largest retailer of used vehicles in the U.S., generating additional revenue through financing and services, which allows it to capture value across multiple transaction stages [10] - The company's third-quarter fiscal 2026 results showed mixed performance; while earnings and revenues exceeded expectations, both declined year over year due to softened used-vehicle demand [11] - CarMax's financing segment generated $174.7 million in income, up over 9% year over year, contributing to overall profitability [11] - The company benefits from a nationwide footprint and logistics network, which enhances vehicle sourcing and distribution efficiency [12] - CarMax is strengthening its ecosystem through acquisitions, such as the purchase of Edmunds, and partnerships that enhance its digital capabilities and insights into used electric vehicles [13] - Management is targeting at least $150 million in SG&A run-rate savings by fiscal 2027, with significant capital returned to shareholders through stock buybacks [14] Carvana Analysis - Carvana is the second-largest used car retailer in the U.S., holding about 1.6% of the fragmented automotive retail market, indicating room for expansion [15] - In 2025, Carvana's retail sales units rose 43% year over year to approximately 596,000 vehicles, with revenues increasing 49% to over $20 billion [16] - Profitability improved, with adjusted EBITDA climbing over 60% to $2.2 billion, and margins expanding from 10.1% to 11% [16] - However, rapid expansion has led to operational pressures, with increased reconditioning costs affecting profit per vehicle [17] - Carvana's outlook for 2026 is somewhat vague, although management anticipates significant growth in retail units sold and adjusted EBITDA [18] - The company believes it can support annual sales of 3 million vehicles, backed by real estate and facilities capable of processing 1.5 million vehicles per year [19] Investment Perspective - CarMax represents a more stable and value-oriented opportunity, benefiting from a well-established network and diversified revenue model, even amid soft sales trends [22] - Ongoing cost-cutting initiatives and logistics improvements could strengthen margins and shareholder returns over time [22] - In contrast, Carvana's growth story comes with operational volatility and a premium valuation, suggesting that much of the growth optimism may already be priced in [21] - CarMax's lower valuation compared to Carvana makes it a more attractive investment choice, with a Zacks Rank of 2 (Buy) versus Carvana's 3 (Hold) [24]