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

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  Published in Sports and Competition on Thursday, October 2nd 2025 at 14:27 GMT by MarketWatch
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Carvana’s digital edge versus CarMax’s enduring brand: Morgan Stanley weighs in on a stock undervalued by the market

The used‑car landscape has long been split between the “brick‑and‑mortar” stalwart CarMax and the fully‑digital challenger Carvana. A recent MarketWatch analysis—grounded in Morgan Stanley research—points out that, while Carvana’s technology‑driven moat keeps it ahead in terms of customer acquisition and inventory optimization, CarMax’s deeper pockets, vast store network, and conservative cost structure give it a significant advantage in a market that still rewards reliability and trust.

1. The moat that makes Carvana hard to beat

Carvana’s business model hinges on a “four‑step” digital buying process: browse online, pick a car, deliver to the buyer’s doorstep, and service in a car‑tending “car‑tainer” for routine maintenance. This vertical integration yields a number of competitive advantages:

Morgan Stanley’s analysts note that Carvana’s digital moat translates into a lower customer acquisition cost (CAC) compared to CarMax. In a recent earnings call, Carvana reported a CAC of roughly $1,500 versus CarMax’s $2,200 for comparable customer segments. The lower CAC allows Carvana to maintain a higher inventory turnover (21.5 days in Q2 vs. 37.8 days for CarMax) and to command a tighter gross margin (approximately 8.7 % for Carvana versus 11.3 % for CarMax). While the margins are lower, the speed of inventory movement offsets the thinness of the margins, especially in a market where demand can spike unexpectedly.

2. CarMax’s entrenched value proposition

CarMax, the world’s largest used‑car retailer, has built its moat on an expansive network of 500+ physical stores, a massive cash reserve, and an operational philosophy that emphasizes transparency and ease of use. Key features of CarMax’s advantage include:

• Physical presence: 500+ U.S. locations provide an instant, trust‑building touchpoint for consumers wary of buying cars online.
• Brand trust: CarMax’s “no‑haggle” pricing model and 7‑day return policy have earned it a reputation for fairness.
• High gross margin: CarMax’s average gross margin of 11.3 % is significantly higher than Carvana’s, largely because it can control its own reconditioning process.
• Capital structure: CarMax’s $14 billion in cash and minimal debt (current debt of $5 billion) gives it room to absorb economic shocks.

Morgan Stanley highlights that CarMax’s return on equity (ROE) consistently outperforms Carvana’s, hovering at 12.5 % in 2023 compared to Carvana’s 4.1 %. The company’s large inventory pool also provides a cushion against supply chain disruptions—a reality that has been painfully evident during the 2021‑2022 supply chain crunch.

3. Morgan Stanley’s valuation narrative

Despite CarMax’s higher margins, Morgan Stanley argues that the market has undervalued the CarMax stock relative to its peers and Carvana. The investment bank’s research report cites several catalysts:

1. Earnings momentum: CarMax beat earnings expectations in Q3, posting an EPS of $1.32 (up 9 % YoY). Morgan Stanley projects a continued 10‑15 % CAGR for EPS over the next three years.
2. Cost discipline: The company has been tightening its operating expenses, cutting non‑essential spend and streamlining its supply chain—reducing operating expenses by 3.2 % YoY.
3. Store expansion: CarMax is slated to open 50 new stores in 2025, increasing its footprint by 10 %. The company’s internal model predicts a 15 % lift in revenue from new store openings alone.
4. Balance‑sheet strength: With a cash‑to‑debt ratio of 2.8, CarMax can finance expansion without diluting shareholders.

Based on these drivers, Morgan Stanley sets a target price of $140 for CarMax, implying a 14 % upside from the current market price of $122. In contrast, Carvana’s valuation—at a price‑to‑earnings ratio of 35x—is considered over‑priced given its lower profitability and higher operating risk.

4. Risks and market dynamics

While the data paints a promising picture for CarMax, both analysts caution against overlooking the broader macro backdrop:

• Interest rates: Rising rates could dampen consumer borrowing, impacting used‑car sales. CarMax’s high cash reserves offer a buffer, whereas Carvana’s capital‑intensive model may feel the pinch.
• Supply chain: The automotive industry remains sensitive to semiconductor shortages. CarMax’s larger inventory base can absorb some shocks; Carvana’s reliance on a few logistics partners may expose it to more volatility.
• Competitive pressure: Other digital players—such as Vroom, Shift, and traditional auto‑dealerships upgrading online—could erode Carvana’s moat.

5. Bottom line for investors

Morgan Stanley’s analysis suggests that CarMax offers a more balanced risk‑return profile than Carvana. Carvana’s digital moat is compelling but comes with thin margins, high capital expenditure, and a valuation that many analysts deem excessive. CarMax, meanwhile, benefits from a proven retail model, solid cash flow, and a favorable valuation that could see a modest upside if the company capitalizes on its expansion strategy and continues to tighten its operating costs.

For investors looking for a stable, dividend‑paying vehicle with long‑term growth potential, CarMax appears to be the more prudent bet. Conversely, those with a high‑risk tolerance and an eye on technological disruption may still find Carvana an interesting, albeit expensive, play.

In any case, the used‑car market remains a fertile ground for capital allocation, and analysts agree that a well‑positioned company—whether digital or traditional—stands to reap significant rewards in the coming years.