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Used-Car Prices Are Sure to Sputter. What Happens to Carvana and CarMax.

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A Carvana car vending machine tower structure at a dealership in Westminster, Calif.

David Tonelson/Dreamstime.com

The pandemic has been a roller coaster for used-car giants Carvana and CarMax.

Soaring used-car prices- sent their share prices rocketing up until August. Since then the companies have seen their stocks hammered because they were having trouble getting enough vehicles to sell. Then, on Wednesday General Motors (ticker: GM) announced its plan to sell used-cars online in direct competition, sending the share prices of the used-car companies down some more.

Carvana shares (CVNA) have declined 55% since August while CarMax shares (KMX) have dropped 24% since November. On Thursday, Carvana skidded 8% to $163, and CarMax slid 1.5% to $117.49.

But a number of Wall Street analysts say investors have overreacted to Carvana’s and CarMax’s travails and at their current share prices, the used-car companies represent attractive buys.

Everyone wants to buy used cars these days. Rising prices for preowned cream puffs just drove inflation to its highest reading in decades. As my own car nears the end of its lease, we’ve been peppered with calls from dealers desperate to get it onto their lots.

This love for pre-loved vehicles arose from the coincidence of semiconductor-starved new car scarcity and the need for cheap rides by the pandemic unemployed. It was a two-edged sword for Carvana and CarMax. What scarcity gave to their gross margins, it took away from their unit sales.

GM’s hopes to debut its online used-car, CarBravo, in the spring. The service will give participating local dealers an expanded supply and outlet for used cars. It could subtract from the used cars available at auction to independent sellers, like CarMax and Carvana.

J.P. Morgan analyst Rajat Gupta believes the two used-car car sellers are steps ahead already, and has a buy on CarMax. “Carvana and CarMax have already shifted a lot of their sourcing away from auctions, and to sourcing direct from consumers,” Gupta told me. “So I would not expect this to have a negative impact.”

CarMax also thinks it has a jump on GM. “What they have set out to do is difficult,” said CarMax marketing chief Jim Lyski, in a written statement. “They will need to build out capabilities to deliver the seamless online to in-store experience customers demand, and do that across all their dealers.”

GM is unlikely to be the last car company wading into the used-car business, said Needham analyst Chris Pierce. “I’m sure that every manufacturer will follow GM online,” he told me. “The whole food chain is going digital.”

The Needham analyst has maintained his Buy rating on Carvana as its price skidded from last summer’s height of $376 to a recent $163, falling 15% since Tuesday.

Pierce believes that rising supplies of new cars as the economy recovers from the pandemic will return used-car pricing back to earth. Carvana will open a raft of new inspection and refurbishment centers this year. Those developments should support used-car demand. So should the arrival of tax refund season.

The Needham analyst thinks Carvana sales will do better than Wall Street’s consensus forecast, with the company’s sales rising 38% in 2022 and then another 25% in 2023, to sales of $21.6 billion and cash earnings from operations of $820 million. He bets that Carvana stock can recover to $378.

For its part, Carvana believes it will do just fine. The company “pioneered online car buying and is the fastest retailer to sell one million vehicles online,” a spokesman said. “Our focus has always been and remains squarely on our customers.”

J.P. Morgan’s Gupta dropped his Carvana rating from Overweight to Neutral back in June, when the stock was at $313. In December, he upgraded CarMax to Overweight. The analyst thinks CarMax’s $117 shares can rise to $160 as rising unit sales carry annual earnings from the Covid-depressed level of $4.52 a share in the fiscal year ended February 2021, to $7.66 this fiscal year, and $8.25 a share by the February 2024 year.

Gupta says the biggest bottleneck affecting used car sellers now is a shortage of labor. When the pandemic subsides and people return to work—and new car inventories refill—he thinks sales volumes will rise for CarMax and other used-car sellers.

Even the arrival of GM shouldn’t diminish the opportunity, the J.P. Morgan analyst said. “The used-vehicle market is a pretty big market and very, very fragmented in nature,” Gupta said. “So I don’t think this will come in the way of growth opportunities for CarMax or Carvana.”

And I had better hurry to get the best offer for my off-lease car.

Write to Bill Alpert at [email protected]