Since March 15, 2020, as investors began to understand the effects of the COVID-19 pandemic on consumer behavior, Carvana (NYSE: CVNA) shares have increased roughly 167% compared to the S&P 500's 19% gain. Carvana outshined a vast majority of auto stocks, simply because its online car buying business model with contactless delivery options was tailor-made to thrive during social distancing. Here's more good news: New data suggests that in addition to Carvana, broader used car retailers such as CarMax (NYSE: KMX) could be poised to soar even further.
According to data from Edmunds.com, more consumers appear to be moving from the new vehicle market into the used vehicle market. That move could be for a number of reasons, including higher job and economic uncertainty making consumers cautious about purchasing a higher-priced new vehicle. They are instead opting for more value in the used car market. It's also true that due to temporary auto factory shutdowns, there's less new vehicle inventory than usual, and consumers might not be willing to complete the purchase if the right vehicle with specific options isn't available.
There's even a theory for the used car market attracting new consumers, as the share of used vehicle purchases with a trade-in dropped to the lowest level since February 2009. "The fact that there are fewer people trading in a vehicle when making a car purchase could indicate that there are consumers entering the market for the first time -- possibly due to concerns surrounding public transportation -- which is an exciting prospect for the industry," said Jessica Caldwell, Edmunds' executive director of insights, in a press release.
While consumers might temporarily move from the new vehicle market to the used market during COVID-19, it's also true that used vehicles have slowly become more compelling as a substitute product for a more expensive new vehicle. In fact, the gap in price between a new vehicle and a used vehicle has increased 43% between the third quarter of 2010 and the third quarter of 2019.
Sales of new vehicles continue to creep higher. The average price of a new vehicle in the U.S. in 2019 was $37,200. That was a noticeable leap from $35,900 in 2018 and a significant jump from $29,800 in 2010. There are a number of reasons that new vehicle prices continue to drive higher: including a higher sales mix of larger, and more expensive, SUVs and Trucks, but also more and more technology and premium options are driving prices higher as well. But the gap between new and used prices is a very real, and very compelling, difference for consumers seeking value. With new vehicle prices consistently rising, some dealerships have turned to Certified Pre-Owned (CPO) programs to sell used vehicles, and those sales have jumped from 1.64 million units in 2010 to over 2.8 million last year. Furthermore, we can expect the strong CPO selling trend to continue. CPO inventory will almost assuredly be bolstered by years of high lease volume, which will fuel supply of compelling three-year-old off-lease used vehicles.
No longer an afterthought
Used cars have traditionally been an afterthought for not only consumers, but for investors. But that could be changing in front of our eyes, as used vehicles are becoming a compelling value and substitute option and the used car industry is ripe for disruption and consolidation. Used car sales volume has already more than doubled the new vehicle market at roughly 40 million and 17 million units, respectively, in 2019.
Investors should also remember that the used vehicle retail market is highly fractured, with leader CarMax owning roughly 2% and Carvana's market share across its 146 markets at 0.46%. If the industry slowly consolidates, there's lucrative growth potential for used car retailers. Just imagine if CarMax and Carvana owned market share that compared to top retailers in other industries that often boast double-digit share, and sometimes into the 20% to 30% range. While it will take decades to even possibly reach those market share figures, CarMax and Carvana are both working toward it by luring in person to person buyers by offering to purchase their vehicle even if they don't buy one from the auto retailer. Further, industry consolidation should happen over time as the auto retailers can use their scale, massive online vehicle selection and delivery, extensive data and pricing efficiencies, and marketing resources to squash, or perhaps absorb, smaller competitors.
Ultimately, there are a number of driving forces that are pushing consumers toward used vehicles. That's great news for retailers such as CarMax, and especially positive news for e-commerce-based car retailers such as Carvana and newly publicly traded Vroom (NASDAQ: VRM). If the gap between new and used prices continues to grow, used car retailers will increase their market share to compare to other industries, and if more consumers are owning a car for the first time, shares of Carvana and CarMax will be poised to soar.
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