Rising Electric Vehicle Adoption And Cost Pressures Will Shrink Demand

Key Takeaways

• Disruptive industry trends and competition threaten O'Reilly’s market share, revenue base, and pricing power over the long term.
  
• Rising labor, compliance, and inventory costs, combined with slower incremental growth, will likely compress margins and earnings.
  
• Aging vehicles, operational discipline, robust sourcing, and service focus position O'Reilly to outpace weaker rivals and achieve steady, long-term growth despite macroeconomic challenges.

Catalysts

Operates as a retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States, Puerto Rico, Mexico, and Canada.

• Increasing adoption of electric vehicles and autonomous driving technologies is expected to significantly reduce demand for replacement parts and maintenance services for internal combustion vehicles, directly shrinking O'Reilly's core addressable market and threatening long-term revenue growth.
  
• The accelerated rise of shared mobility and shifts toward urbanization are likely to reduce per-capita car ownership and vehicle miles driven, undermining the steady demand O'Reilly relies upon and placing downward pressure on both topline sales and same-store revenue growth.
  
• Margin compression appears likely as labor costs escalate and regulatory compliance costs rise, while diminishing returns from new store openings in an increasingly saturated market are expected to slow incremental earnings and reduce operating leverage.
  
• Competitive pressures from e-commerce giants entering the auto parts space will likely intensify, leading to sustained pricing pressure that erodes O'Reilly's net margins, while consolidation among parts suppliers weakens O'Reilly's bargaining power and could result in higher cost of goods sold.
  
• The risk of lagging digital transformation leaves O'Reilly vulnerable to losing online market share to more technologically agile competitors, impairing the company’s ability to capture future revenue growth as more purchasing shifts online over the coming years.

O'Reilly Automotive Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on O'Reilly Automotive compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming O'Reilly Automotive's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.1% today to 14.5% in 3 years time.
• The bearish analysts expect earnings to reach $2.9 billion (and earnings per share of $3.65) by about July 2028, up from $2.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.9x on those 2028 earnings, down from 34.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 1.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

O'Reilly Automotive Future Earnings Per Share Growth

Risks

• The continued aging of the U.S. vehicle fleet, coupled with consumer reluctance to absorb the growing cost of a new car or higher monthly payments, is likely to support elevated demand for auto maintenance, directly benefitting O’Reilly’s revenues and providing a supportive backdrop for long-term growth.
  
• O’Reilly’s steady expansion of its store network, coupled with ongoing opportunities for M&A (even if mostly smaller deals), positions the company to further increase market share over time, which may drive top-line revenue and support sustained earnings growth.
  
• The company has proven disciplined and proactive in managing supply chain disruptions and shifting sourcing away from China when needed, supported by robust private label development and diversified global sourcing, thereby limiting risks to gross margin and protecting long-term profitability.
  
• Industry consolidation, ongoing operational investments, and O'Reilly's reputation for premium service grant it a negotiating edge with suppliers, while also enabling capture of market share from smaller, less resilient independents—helping maintain or improve both revenue and net margin over time.
  
• Strong focus on inventory optimization, technology, and customer service (especially in the professional/DIFM segment), combined with the company’s flexibility to manage cost inflation, suggest that O’Reilly can navigate macro uncertainty with only modest impacts to net earnings, rather than experiencing a significant decline.

Valuation

• The assumed bearish price target for O'Reilly Automotive is $67.2, which represents two standard deviations below the consensus price target of $95.75. This valuation is based on what can be assumed as the expectations of O'Reilly Automotive's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $113.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $19.7 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 7.9%.
• Given the current share price of $95.42, the bearish analyst price target of $67.2 is 42.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.