Carvana has a 'competitive moat' over CarMax. But don't sleep on CarMax's stock, Morgan Stanley says.

By Claudia Assis

Morgan Stanley slashes its price target on CarMax shares but sees upside despite competition from Carvana

Morgan Stanley sees "investor capitulation" on display as CarMax and Carvana shares have differed this year.

CarMax Inc.'s recent profit miss and the stock's 20% selloff have made analysts at Morgan Stanley question the used-car retailer's ability to operate in a "competitive" environment - and much more so when that competitor is none other than Carvana Co.

It is "hard to believe they're in the same industry," the Morgan Stanley analysts said in a note Thursday.

"Investor capitulation," they said, is on display, as CarMax shares (KMX) are down about 45% this year, in sharp contrast with gains of about 85% for Carvana (CVNA) in the same period.

CarMax's stock is likely to remain range-bound until Wall Street "can regain confidence" in the company, they said. "Investors are now, more than ever, grappling with the debate of whether CarMax can grow [market] share at all with omni-channel."

CarMax unveiled a new "omni-channel" strategy in August, offering customers what it called a "seamless" option to buy its vehicles either online or at stores.

The retailer disappointed Wall Street last week when it reported second-quarter profit, sales and average used-car prices that all fell.

The Morgan Stanley analysts said they prefer Carvana's stock, which they rate as the equivalent of buy. They kept the same buy-equivalent rating on CarMax shares but cut their price target to $56 from $80. That lower price target, however, still represents a 20% upside over Thursday's share price.

They also highlighted the differences between the two used-car retailers.

Carvana reported a sixth straight quarter of beats, while CarMax "regressed" back into market-share loss, they said.

"We believe that the negative growth CarMax is experiencing is reflective of a highly competitive used-car market and demonstrates Carvana's competitive moat," they said.

"Carvana is a clear best-in-class digital disruptor," growing revenue at a 25% compound annual growth rate through the end of the decade, and at Ebidta margins that are more than two times the margins of franchise-dealer peers as well as CarMax, they said.

In the note, the analysts pointed at stock valuation as one reason for keeping their rating on CarMax shares intact. For starters, the stock is trading near historic lows, they said.

Moreover, CarMax could return to growth, the analysts said. It has expanded capacity, opening three out of four planned vehicle-reconditioning centers; has sought more profitable sourcing channels; and is giving consumers the option to buy online or at stores, they said.

-Claudia Assis

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10-02-25 1310ET