E-commerce based used-car retailer, Carvana’s (NYSE: CVNA) P/S (price-to-sales) multiple of 2.7x is higher than the figure of 0.9x for CarMax (NYSE: KMX), a used-car industry leader. So, is Carvana stock too expensive compared to CarMax stock? We believe that Carvana stock is currently overvalued compared to CarMax stock, due to the notable mismatch in their current P/S multiples when compared with returns and risk profiles for the two companies over recent years.
Carvana’s revenue growth is much higher (114% average annual revenue growth over the 2017-2019 period vs about 8.9% for CarMax), which explains the higher P/S multiple. However, CarMax’s returns are better. Specifically, CarMax’s net income margin (net profits as a percent of revenue) stood at over