Consumers looking to purchase a used vehicle in the fourth quarter of this year from used car marketplaces like Carvana Co CVNA and CarGurus Inc CARG are in for a treat.
But, if you’re an investor in either company, you may want to skip the next part.
For The Investor: Carvana's stock fell 15% on Monday to end the day at $7.39 a share, continuing the dismal trend that started on Friday when the stock saw its worst-ever one-day performance, falling 39% following the release of underwhelming revenues as a result of weaker-than-expected sales.
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Following suit, CarGurus shares dropped by near to 33% in after-hours trading on Tuesday before recovering some of those losses on Wednesday. This was due to the Cambridge-based company's earnings report being below consensus expectations on both the top and bottom lines.
The decline in used-vehicle companies' stock prices hints at a bigger trend in the industry, as car prices have been steadily increasing for the past two years, boosted by rising interest rates and recession concerns.
The U.S.'s largest used car dealer, CarMax Inc. KMX, has seen a 50% decline in share price year to date, another sign that the overheated used car market, which has been overdue for a correction for some time, is starting to lose steam.
For The Consumer: The biggest worries of companies whose business model is centered on used vehicles were confirmed by a report released on Monday by the Manheim Used Vehicle Index, a yardstick that evaluates the prices car dealerships pay for used cars at auctions.
According to the index, used automobile prices fell by 2% from September to October's first half and are down by 10.3% from a year ago.
Additionally, used vehicle prices have dropped by 15% over the past nine months, which is the biggest nine-month reduction ever recorded according to statistics going back to 2008 — it may be time to buy that new-used car.
“2022 has been the year of giving back some of the big 2021 increases when it comes to wholesale used-vehicle values,” said Cox Automotive Chief Economist Jonathan Smoke.
Why It Matters: As a result of a shortage of parts (notably the chip shortage), which restricted the supply of new automobiles at a time when customer demand for vehicles was particularly high, car prices had been steadily rising over the previous two years, supporting the growth of Carvana and the like.
The Federal Reserve has lately increased interest rates at a historic rate in an effort to slow the economy and reduce consumer demand in response to efforts to contain price increases.
Because many car purchases are financed by customers, the automotive industry is particularly vulnerable to an increase in interest rates, which makes borrowing more expensive.
Used vehicle costs in 2020 were on the rise, which was a sign that inflation would increase in the future. The current slump may be a precursor to future periods of reduced inflation rates.
New Consumer Price Index (CPI) data will be announced on Thursday, with new and used motor vehicles holding 9.2% of the weight of the total price index.
A fall in the vehicle index could bring top-line inflation down, so long as other areas in the index do not increase.
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