Copart's Growth Stagnation Exacerbated by Cost Surges and Cash Hoarding

What happened

Copart has transformed the salvage vehicle market with its global digital auction platform, historically delivering high margins and consistent growth. However, Q1 FY26 revenue grew a mere 0.7% year-over-year, highlighting a severe slowdown as unit volumes stagnate amid declining accident frequency. Concurrently, administrative costs have surged since 2024, pressuring margins despite strong pricing gains, while the company sits on over $5 billion in cash unreturned to shareholders, fueling investor discontent. Market sentiment has shifted from viewing Copart as a defensive compounder to a business grappling with growth headwinds, competitive threats from IAA, and regulatory uncertainty from a DOJ investigation. This combination of stalled top-line expansion, escalating costs, and poor capital allocation creates a precarious environment for the stock at its current valuation.

Implication

First, Copart's high P/E of 25.3x is unsustainable without a return to mid-single-digit revenue growth, risking a de-rating toward 20x if stagnation persists. Second, rising administrative costs could erode the robust 36% operating margin, undermining the core fee-based economics that support its premium valuation. Third, the $5 billion cash pile represents a significant opportunity cost and management indecision, with no dividends or meaningful buybacks to bolster shareholder returns. Fourth, competitive pressures from IAA and structural declines in crash frequency threaten volume recovery, limiting upside without major contract wins. Finally, the DOJ investigation adds regulatory overhang, meaning any negative outcome could trigger fines and compliance costs that further dampen investor confidence.

Thesis delta

The new article corroborates the DeepValue report's concerns by emphasizing administrative cost inflation and capital allocation issues, but it does not materially alter the investment thesis. The core thesis remains that Copart is overvalued without evidence of growth re-acceleration, and this update reinforces the need for both operational execution and financial discipline to change the 'WAIT' rating. Thus, the shift is minimal, but it underscores that margin pressures and cash mismanagement are now more prominent risks alongside the previously identified growth challenges.