Copart's Q2 2026 Earnings Reveal Declining Revenue and Profits, Challenging Growth Narrative

What happened

Copart reported second-quarter fiscal 2026 financial results with revenue down 3.6% to $1.1 billion, gross profit falling 6.2% to $492.8 million, and net income attributable to Copart decreasing, indicating a contraction from prior periods. This contrasts with the DeepValue report's emphasis on Copart's historical resilience, including FY25 revenue growth of 9.7% and strong average selling price (ASP) outperformance versus peers. The declines suggest that headwinds like weaker insurance claim volumes and competitive pressures from rivals such as RB Global/IAA are having a more pronounced impact than previously modeled. Despite management's potential framing of this as cyclical softness, the gross profit drop outpacing revenue hints at margin compression, possibly due to rising facility costs or ASP erosion. Investors must now question whether this quarter signals a deeper structural shift rather than a temporary setback, especially given ongoing DOJ investigation risks.

Implication

The revenue and profit declines in Q2 2026 challenge Copart's ability to sustain high single-digit EPS growth, likely compressing its ~25x P/E multiple further if trends persist. In the short term, this increases the urgency of watching insurance and Blue Car unit growth in upcoming quarters, as stagnation could trigger a move toward the Bear scenario with implied value of $34. Longer-term, the margin compression raises red flags about operational leverage and cost management, necessitating a reassessment of Copart's competitive edge against RB Global/IAA. Additionally, the DOJ investigation becomes more critical; any negative outcome could exacerbate financial pressures and damage investor confidence. Portfolio holders should consider trimming positions until clearer signs of recovery emerge, while potential buyers might wait for a deeper entry below $40 to account for heightened risks.

Thesis delta

The DeepValue thesis of structural growth driven by rising total-loss frequency and high margins is now under pressure, as volume declines and profit drops suggest headwinds are intensifying. This shifts the probability weighting more toward the Bear scenario, requiring investors to demand stronger evidence of unit growth and ASP resilience in future reports. If these trends continue, the investment case may need downgrading from 'POTENTIAL BUY' to 'HOLD' or 'SELL,' pending regulatory clarity and competitive dynamics.