Shares of Carvana (CVNA) are under pressure after CarMax (KMX) formally announced its omni-channel offering to allow consumers to buy a car completely from home, in-store or a combination. Commenting on the news, Baird analyst Colin Sebastian told investors that he views the new offering as an endorsement of Carvana's digital model and argued that the U.S. used car market is not "winner takes all.” Meanwhile, his peer at Craig-Hallum cut his price target on Carvana’s shares, citing rising competition.
NEW ONLINE, HOME DELIVERY OFFERING: CarMax has announced the rollout of a new customer-driven buying experience launching first in Atlanta, Georgia, with plans to scale nationwide. CarMax said that, "For the first time, CarMax customers will have a choice as to how they want to buy a car - from home, in-store, or a seamless combination of both. […] Customers can customize their car buying experience, whether they want to buy a car completely from home, in-store, or through a seamlessly integrated combination of online and in-store experiences. The company is also launching a new express pickup option, which allows customers to do most of the process online and complete their purchase in store in as little as 30 minutes."
NOT A ‘WINNER TAKES ALL’ MARKET: In a research note to investors, Baird’s Sebastian noted that CarMax’s new service is similar to Carvana's e-commerce offering and views it as an endorsement of the latter’s digital model. While the 10% slide in Carvana shares suggests significant concerns regarding the impact of CarMax's new offering, the analyst argued that it is not a "winner takes all market" and sees room in the $800B annual U.S. used car market for multiple players. Using Amazon (AMZN) as an example, Sebastian pointed out that while the e-commerce giant has dominated growth of online sales of general merchandise, there are plenty of successful pure-play e-commerce and marketplace models in much smaller retail categories with a high degree of omni-channel competition, including Zappos, Fanatics, Wayfair (W), Chewy, and Grubhub (GRUB), and spanning numerous segments of retail. Further, the analyst pointed out that experience suggests that many traditional retailers ultimately struggle to manage the challenges of operating e-commerce and brick-and-mortar channels simultaneously. With no changes to his positive long-view on Carvana, Sebastian reiterated an Outperform rating and $68 price target on the shares.
INCREASED COMPETITION FOR CARVANA: Not as bullish on Carvana, Craig-Hallum analyst Steve Dyer lowered his price target on the stock to $40 from $48 to account for greater competitive threats. CarMax’s offering appears to be very similar to Carvana’s, with the ability to complete the entire car buying process from home including financing, vehicle delivery with free 7-day returns, and vast vehicle selection, he contended, noting that Carvana has proven that many consumers are willing to buy vehicles online. CarMax is the latest competitor to increase focus on this rapidly growing market opportunity following recent investments by Lithia (LAD) in Shift and AutoNation (AN) in Vroom, Dyer noted. In addition to investors “underappreciating the competitive response to Carvana’s e-commerce offering,” the analyst believes the hybrid brick-and-mortar and e-commerce platform could be the ideal solution for changing consumer demands. Dyer reiterated a Hold rating on Carvana’s shares.
PRICE ACTION: In afternoon trading, shares of Carvana have dropped almost 11% to $38.31, while CarMax’s stock has slipped about 2% to $64.35.
