Digital Transformation And E-Commerce Will Empower Used Car Buying

Key Takeaways

• Investments in digital retailing, data-driven inventory management, and logistics optimization are improving operational efficiency, customer acquisition, and expanding profit margins.
  
• CarMax’s strong brand, national presence, and diverse inventory position it to benefit from increasing consumer demand for used cars and to gain market share.
  
• Disruptive industry shifts, digital competition, declining ownership trends, financial exposure, and high fixed costs threaten CarMax’s market share, profitability, and long-term revenue growth.

Catalysts

Through its subsidiaries, operates as a retailer of used vehicles and related products in the United States.

• Continued investment in digital capabilities and omnichannel retailing, including AI-powered virtual assistants, streamlined online appraisal and financing tools, and a growing mix of digitally supported sales, is expected to drive higher conversion rates and lower customer acquisition costs, resulting in sustained retail sales growth and expanding net margins over the long term.
  
• The structural trend of consumers increasingly valuing affordability, combined with the growing longevity of vehicles and higher new car prices due to tariffs, is expected to accelerate the shift toward used car purchases. CarMax's national footprint, expanding inventory of both late-model and older vehicles, and trusted brand position it to capture disproportionate market share gains, driving robust top-line growth.
  
• Ongoing enhancements in data-driven inventory management and expanded dealer/consumer sourcing through Max Offer and integrated digital systems are increasing inventory turn and minimizing risk, leading to improved gross margins and higher overall profitability as the company scales.
  
• Significant cost efficiency gains from expanded reconditioning and auction facilities, logistics optimization, and streamlined service operations are driving down cost of goods sold per unit and SG&A as a percentage of gross profit. These operational improvements support both affordability for customers and operating leverage, enhancing earnings growth prospects.
  
• The buildout and successful performance of CarMax Auto Finance, including expansion into a broader credit spectrum and improved securitization programs, is enabling higher penetration rates and incremental unit sales. Over time, this provides an additional lever for earnings growth, as net interest margins and financing income compound with rising volume, further amplifying future EPS increases.

CarMax Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on CarMax compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming CarMax's revenue will grow by 4.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.8% today to 3.3% in 3 years time.
• The bullish analysts expect earnings to reach $1.1 billion (and earnings per share of $7.42) by about April 2028, up from $500.6 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 21.3x on those 2028 earnings, up from 19.7x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 2.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

CarMax Future Earnings Per Share Growth

Risks

• The accelerating transition to electric vehicles and factory-direct sales models by EV makers could reduce the supply and diversity of used vehicles that CarMax can access, ultimately limiting its inventory and putting long-term pressure on both revenue growth and gross margins.
  
• Growing consumer adoption of digital-first, online car buying has intensified competition from online-focused retailers and new entrants with lower fixed costs, threatening CarMax’s market share and putting its top-line revenue at risk, particularly if digital transformation lags sector peers.
  
• Expansion of mobility-as-a-service and declining personal vehicle ownership may shrink the pool of traditional used car buyers over time, decreasing overall demand for CarMax’s core products and eroding its total addressable market, negatively impacting unit volume and overall sales.
  
• CarMax’s reliance on its captive finance arm, CarMax Auto Finance, exposes it to volatility in earnings and margin compression if interest rates rise or credit conditions tighten, as well as requiring stepped-up provisions for loan losses as credit quality in the borrower base shifts, which could impact net earnings stability over time.
  
• The substantial fixed costs associated with CarMax’s nationwide physical store and reconditioning footprint create operational leverage risk; a sustained shift toward online buying and cyclical or structural declines in unit sales would pressure net margins and profitability due to this high fixed cost base.

Valuation

• The assumed bullish price target for CarMax is $116.51, which represents two standard deviations above the consensus price target of $84.46. This valuation is based on what can be assumed as the expectations of CarMax'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 $118.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $32.2 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $64.59, the bullish analyst price target of $116.51 is 44.6% 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.