Digital Car Buying And Aging Fleets Will Drive Opportunity

Key Takeaways

• Expanding digital sales infrastructure and omnichannel strategy are enabling operational efficiencies, wider reach, and stronger revenue growth across both new and used vehicle segments.
  
• Growth in after-sales services and finance operations, paired with Sunbelt market presence, underpins higher margins, earnings consistency, and resilience to market fluctuations.
  
• Heavy reliance on traditional dealerships and limited geographic reach heighten long-term risks as digital disruption, changing mobility preferences, and evolving industry competition threaten margins and revenue.

Catalysts

Through its subsidiaries, operates as an automotive retailer in the United States.

• AutoNation is poised to benefit from the ongoing shift to digital vehicle purchases and greater consumer adoption of omnichannel car buying. Its investments in online sales infrastructure and seamless integration with physical stores allow AutoNation to reach a wider audience and sell vehicles more efficiently, supporting outperformance in unit sales growth and driving higher top-line revenues over the coming years.
  
• The increasing age and longevity of vehicles on U.S. roads is creating a persistently large pool of cars in need of regular maintenance and repairs. AutoNation’s expanding After-Sales business is capturing a growing share of this high-margin service demand, leading to recurring revenue growth and consistent gross margin gains that support long-term improvements in net earnings.
  
• AutoNation’s in-house finance arm, AN Finance, is scaling rapidly while improving credit quality and reducing capital requirements through increasing nonrecourse and ABS funding. This positions the company to generate substantial high-margin net interest income per transaction and meaningfully enhance return on equity and earnings per share as portfolio profitability accelerates into 2025 and beyond.
  
• Continued population growth and urban development in Sunbelt markets, where AutoNation is a leading player, is expected to deliver above-market demand for both new and used vehicles. This demographic tailwind enables sustained volume growth and helps buffer revenues and earnings against wider market cyclicality.
  
• The rollout of additional AutoNation USA stand-alone used car stores supports expansion into new markets and increases operational scale. This allows AutoNation to grow used vehicle unit sales, leverage supply chain efficiencies, and improve gross profit dollars, further accelerating top-line growth and enhancing net margins over the long term.

AutoNation Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on AutoNation compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming AutoNation's revenue will grow by 5.4% annually over the next 3 years.
• The bullish analysts are assuming AutoNation's profit margins will remain the same at 2.6% over the next 3 years.
• The bullish analysts expect earnings to reach $805.0 million (and earnings per share of $22.17) by about April 2028, up from $692.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, up from 9.6x today. This future PE is lower than the current PE for the US Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 3.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.63%, as per the Simply Wall St company report.

AutoNation Future Earnings Per Share Growth

Risks

• AutoNation’s heavy capital investments in brick-and-mortar dealerships and large inventory expose the company to margin and asset utilization risk as digital-first and direct-to-consumer models continue to grow, which is likely to put downward pressure on return on assets and long-term profitability.
  
• The increasing adoption of electric vehicles and direct sales channels by manufacturers may erode dealership relevance, reducing showroom traffic and resulting in decreased new vehicle revenues and potentially lower gross profits for both sales and after-sales services.
  
• Ongoing margin compression in used vehicles due to supply constraints, high auction prices, and stronger competition from online-only platforms like Carvana and Vroom could threaten AutoNation’s gross and net margins, particularly given management’s emphasis on used vehicle profit stabilization amid heightened industry transparency and inventory pressures.
  
• Demographic shifts away from individual vehicle ownership towards alternative mobility solutions such as ride-sharing and subscription models are likely to shrink AutoNation’s addressable market, posing a risk to long-term revenue growth.
  
• AutoNation’s lack of international diversification exposes it to cyclical volatility in the U.S. auto market, which could amplify swings in earnings and reduce revenue stability during industry downturns or if U.S.-specific regulatory, economic, or geopolitical shocks occur.

Valuation

• The assumed bullish price target for AutoNation is $245.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AutoNation's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $245.0, and the most bearish reporting a price target of just $175.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $31.4 billion, earnings will come to $805.0 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of $169.05, the bullish analyst price target of $245.0 is 31.0% higher.
  
• 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.