CarMax reported, stocks fell further. Shares of online used car startups Vroom, Carvana and Shift have already collapsed

CarMax has struggled against exorbitant prices. Used car companies are facing an existential crisis. Vroom shares collapsed 97%.

Written by Wolf Richter for WOLF STREET.

When it comes to publicly traded used car dealers, CarMax is the adult in the room. Online used vehicle IPOs and SPACs Carvana, Vroom and Shift Technologies are losing money and may never make any money selling used cars because they weren’t designed to be profitable. Their stock has completely collapsed in a stunning display of how Wall Street has systematically cleaned up stock racers, ending up with these things directly or indirectly.

But CarMax makes money. However, today’s earnings report caused its already declining stock to drop nearly 10%, to $93.33, its first time in 2019. It is down 40% from its November high. The earnings report pointed to a problem created by the industry itself, while customers, confused by an inflationary mindset, agreed: ridiculous prices. But enough customers are suddenly resisting. Before we get to CarMax, let’s take a look at the three used car dealers whose stocks have completely collapsed.

from [VRM] It started trading after its initial public offering in June 2020. Its shares have now collapsed 97% from their September 2020 high and closed the day at $2.08, a new all-time low (data via YCharts):

transformation techniques [SFT] It went public through a merger with SPAC in 2020. The transaction was announced in June 2020 and completed in October of that year. Its shares collapsed 87% from their June 29, 2020 high to $1.89 at the close today (data via YCharts):

Carvana [CVNA]Ltd., the original online used car dealer, went public in April 2017, at an initial public offering price of $15 per share. The hype, despite large and growing losses every year for the past six years, has been such as to push the stocks higher and higher. In August 2021, the shares exceeded $376. And that it was. The great spirit of propaganda suddenly disappeared. They closed the day at $100.78, down 73% from the high, and returned to February 2020 levels:

These schemes are indictments From the hoaxes played on Wall Street, Regret the confused knights who bought this stuff on wing and pray, believe in FOMO, believe in BTFD, believe in YOLO, believe in all the other memes, believe in a lot of hype because they found out it was different this time or because they didn’t They absolutely recognize and just bought.

But CarMax He is an expert in the industry. They know what they’re doing. They’ve been making big profits for many years in the same industry as the Vroom, Carvana and Shift lose an arm and a leg.

CarMax said today in its earnings report that used car retail sales, in terms of the number of vehicles sold, fell 5.2% year-over-year in the quarter ended February 28, and fell 6.5% on a comparable store basis. .

But the average retail price is up 39.7%, or $8,300 per vehicle. In other words, customers who actually buy pay on average Over $8,300 for a car than they did a year ago. This is a huge price increase.

Thanks to these ridiculous price increases, used car revenue in dollar terms rose 32.6% and total revenue by 48.8%.

But this cannot be maintained. Consumers have had enough. And their resistance is already having an effect – that’s what CarMax hinted at today.

Across the industry, the total number of cars sold in March by dealers to retail customers fell 15% year on year, Cox Automotive estimates. This came despite a significant year-over-year increase in tax refunds in March.

But wait.. that was the month of March that wasn’t even included in today’s CarMax earnings report for the quarter ending February 28. CarMax will capture the industry’s March decline in unit sales in its upcoming earnings report.

“We believe a number of overall factors impacted the unit sales performance in the fourth quarter, including lower consumer confidence, a sudden rise in Omicron-backed COVID cases, vehicle affordability, and stimulus benefits paid in the prior year period,” the company said. Note the term “car affordability.”

and stock [KMX] It took a further drop, down 40% from its peak in November 2021:

This term, “car affordability” means that the industry has gone too far in raising prices, consumers have been playing around for a while, paying whatever, as disoriented as they were by the inflationary mentality, and flush with various incentives and money – from refinancing money , remaining PPP loans, etc., which all made up part of the trillions of dollars released by the government and the Federal Reserve.

Now there are not enough of these types of confused buyers left, there is price resistance, and used car prices are dropping. This was also captured by today’s used car consumer price index, which fell 3.8% in March from February, after falling by 0.25% in the previous month. But the index was still up 35% year over year:

There is an underlying problem with a lot of cars now. Since retail prices are trending lower as consumers own them and they fight back at those ridiculous prices, inventory bought at these ridiculous prices will put pressure on gross profit per unit. CarMax is profitable and has been around, and it will not lead to an existential crisis.

But that can’t be said of Vroom, Carvana and Shift because they’ve already lost an arm and a leg every year, even at the best of times when the industry in general has made the biggest profits ever. But now they are facing inflated inventory, low retail prices, high operating costs, and price resistance among potential customers. In addition, in due course, the Federal Reserve will tighten financial conditions for the next few years, which will make it difficult for money-losing companies to obtain financing.

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