Executive Summary / Key Takeaways

• Copart's core investment thesis is underpinned by the secular rise in total loss frequency (TLF) driven by increasing vehicle complexity and repair costs, which makes totaling vehicles more economically attractive for insurers, coupled with the company's dominant digital auction platform and extensive physical footprint.
• Recent financial performance demonstrates solid growth, with Q3 FY25 revenue reaching $1.21 billion (up 7.5% YoY) and net income attributable to Copart at $406.6 million (up 6.4% YoY), supported by strong operating cash flow generation ($1.36 billion for 9M FY25) and a robust liquidity position ($5.6 billion available).
• Technological differentiation, particularly the VB3 auction platform and newer initiatives like Title Express (processing ~1 million titles/year), provides a significant competitive moat by enhancing auction liquidity, improving ASPs, reducing cycle times for sellers, and deepening customer relationships.
• Strategic investments in physical infrastructure (acquiring over 1,100 acres in FY24, dedicated CAT land like Hall Ranch) and expanding non-insurance segments (Blue Car, Dealer, Purple Wave) are crucial for supporting growth, managing volatility (CAT events), and diversifying revenue streams, contributing to the "flywheel effect" of increasing buyer and seller volume.
• While facing risks from competition, macroeconomic factors (including potential tariff impacts and cyclical uninsured motorist rates), and operational challenges (CAT response costs, growth management), Copart's long-term outlook remains positive, driven by fundamental industry trends and disciplined capital allocation focused on enhancing core capabilities and market position.

Setting the Scene: The Engine of Vehicle Remarketing

Copart, Inc. stands as a global leader in online vehicle auctions and remarketing services, occupying a critical niche within the broader automotive ecosystem. Founded in 1982 and becoming a public company in 1994, Copart's journey has been defined by a transformative shift from traditional physical auctions to a pioneering technology-driven online marketplace. This evolution, centered around its proprietary Virtual Bidding Third Generation (VB3) internet auction platform rolled out across its key markets between fiscal 2004 and 2008, fundamentally reshaped the industry, enhancing efficiency, expanding reach, and improving outcomes for both sellers and buyers.

The company's core business revolves around processing and selling vehicles for a diverse base of sellers, predominantly insurance companies dealing with total loss or recovered stolen vehicles, but increasingly including financial institutions, rental car companies, dealers, and even the general public. These vehicles are then auctioned primarily to licensed dismantlers, rebuilders, repair licensees, used vehicle dealers, and exporters. Copart operates through two main reportable segments: the United States and International (covering markets across North America, Europe, the Middle East, and South America).

At the heart of Copart's investment thesis lies its strategic positioning to capitalize on the persistent, long-term trend of rising total loss frequency (TLF). As vehicles become more complex and expensive to repair due to advanced technology, parts costs, and labor rates, insurance companies find it increasingly economical to declare a vehicle a total loss rather than fund costly repairs. Copart provides the essential marketplace to efficiently dispose of these vehicles, maximizing recovery value for insurers. This fundamental dynamic, coupled with Copart's continuous investment in its operational capabilities, technology, and market reach, forms the bedrock of its growth strategy and competitive advantage in a market characterized by significant barriers to entry, including the need for extensive physical infrastructure and a deep, liquid buyer base.

Technological Differentiation and Operational Excellence

Copart's technology platform is not merely a digital interface; it is a core operational asset that provides tangible, quantifiable benefits and serves as a significant competitive moat. The proprietary VB3 internet auction platform is central to this, enabling a global, liquid marketplace that connects sellers with a vast network of registered buyers across numerous countries. This broad reach is critical, particularly as international buyers often bid on and purchase more valuable vehicles, contributing significantly to average selling prices (ASPs). Management notes that their auctions are outperforming other platforms on delivered ASPs, a benefit directly attributable to the active participation of their global member base and the efficiency of their digital platform. While specific, universally applicable percentage improvements in ASPs or processing speeds compared to all alternatives are not detailed quantitatively, the consistent commentary highlights the platform's effectiveness in maximizing sale prices and facilitating rapid transactions.

Beyond the core auction engine, Copart continues to innovate with new technology-enabled service offerings. A prime example is the Title Express service, which addresses a critical point of friction for insurance clients: the complex and time-consuming process of procuring original titles from policyholders and lenders. By leveraging scale, an online lender portal, and AI-powered outbound calling systems, Copart provides an integrated solution that is described as substantially more efficient than carriers performing this function in-house. This service is now processing approximately 1 million titles per year, demonstrating significant adoption and trust from insurance partners. The strategic "so what" for investors is clear: Title Express not only generates service revenue but also deepens relationships with core insurance clients, reduces vehicle cycle times (leading to higher returns and better use of Copart's physical capacity), and further integrates Copart into the insurer's workflow, making the relationship stickier and harder for competitors to replicate.

Copart is also evaluating emerging technologies like AI, machine learning, and generative AI for incorporation into its business processes and systems, aiming to enhance efficiency and scalability. Furthermore, the company has developed a proprietary enterprise operating system specifically to support its international expansion needs, although the ongoing design, development, and implementation of such large-scale systems carry inherent risks of disruption or delay.

The strategic intent behind these technological investments is to continuously improve the efficiency and effectiveness of the marketplace, lower operational costs, enhance the value proposition for both sellers and buyers, and ultimately reinforce Copart's competitive position. While the full quantifiable impact of every new technology initiative may take time to materialize, the consistent focus on leveraging technology to solve operational challenges and improve customer outcomes is a key driver of long-term value.

The Physical Moat: Land and Logistics

Complementing its digital prowess is Copart's extensive physical infrastructure, particularly its owned land and storage facilities. In an industry where vehicles must be physically stored, inspected, and prepared for auction, owning strategically located land is a significant barrier to entry and a competitive advantage. Management emphasizes that suitable land with appropriate zoning is increasingly difficult to procure, making their existing footprint and ongoing land acquisition strategy crucial.

Copart regularly invests in acquiring additional land, developing new facilities, and expanding existing ones to ensure sufficient capacity to accept vehicles, especially during periods of high volume like severe weather events. For instance, in fiscal year 2024 alone, the company acquired over 1,100 acres of land. These investments are critical for maintaining relationships with sellers, as failure to provide timely storage capacity can lead to dissatisfaction and potential loss of business.

The physical network is also fundamental to Copart's robust catastrophic (CAT) response capabilities. Severe weather events like hurricanes and floods significantly increase vehicle volumes, requiring rapid mobilization of resources. Copart's dedicated CAT land portfolio, including recent acquisitions like Hall Ranch in South Florida which adds nearly 400 usable acres for storm storage, provides the necessary physical space to handle large-scale events. Coupled with real-time logistics technology and a strong towing network, this physical capacity enables Copart to respond with speed, as demonstrated during Hurricanes Helene and Milton in late 2024, where they picked up approximately twice as many vehicles in the first 10 days compared to a similarly scaled storm two years prior. This ability to efficiently manage surge volumes is a key differentiator and a vital service for insurance clients dealing with widespread claims. The "so what" for investors is that this physical moat, supported by ongoing capital investment (purchases of property and equipment were $481.35 million for the nine months ended April 30, 2025), underpins operational resilience, supports volume growth, and is difficult for competitors to replicate quickly or at scale.

Business Model and Growth Drivers

Copart's business model is primarily driven by service revenues generated from auction and auction-related fees charged to vehicle sellers and buyers. While the company also engages in vehicle sales (purchasing vehicles outright and reselling them), service revenues constitute the vast majority of its top line (85% in Q3 FY25, 86% in 9M FY25). This agency model, particularly prevalent in its core U.S. insurance business, aligns Copart's interests with its sellers – both benefit from higher auction selling prices.

The primary engine of volume growth for the core insurance business is the secular increase in total loss frequency (TLF). Management highlights that TLF in the U.S. reached 22.8% in Q1 2025 (up 100bps YoY) and hit an all-time high of 23.8% in Q4 2024 (22.2% for the full year FY24). This trend is expected to continue due to the increasing cost of repairing complex modern vehicles relative to their market value. While cyclical factors like the rate of uninsured/underinsured drivers can cause temporary offsets (as observed in the past four years), the long-term economic drivers of TLF remain firmly in place.

Beyond the core insurance segment, Copart is strategically expanding its reach into non-insurance seller segments, including bank and finance companies, rental car fleets (collectively, "Blue Car"), vehicle dealers (Copart Dealer Services - CDS), and consumers (Cash for Cars). This diversification leverages Copart's existing physical and technological infrastructure and its global buyer base to capture additional vehicle volumes. The Blue Car segment has shown particularly strong growth, with year-over-year volume increases ranging from nearly 14% to over 27% in recent quarters. Dealer sales volume has also contributed growth (over 3% in Q3 FY25). While low-value units (charities, municipalities) are being pruned to optimize profitability, the focus on higher-margin non-insurance business lines is a key strategic initiative.

The growth in non-insurance volumes is not just about revenue diversification; it's a critical component of the "flywheel effect." Bringing more vehicles onto the platform, regardless of source, increases auction liquidity, which in turn attracts more buyers and drives higher selling prices. These higher prices benefit all sellers, including insurance companies, reinforcing their relationship with Copart and attracting new sellers. This virtuous cycle is a powerful driver of long-term growth.

Furthermore, Copart has expanded into the heavy equipment auction space through its acquisition of a controlling interest in Purple Wave, Inc. While this market has recently faced softness due to uncertainties in infrastructure spending and tariffs, Purple Wave has still demonstrated robust growth relative to the industry, with GTV growth ranging from 8% to 17% in recent trailing twelve-month periods. This expansion leverages Purple Wave's expertise and Copart's auction scale, representing another avenue for growth and diversification.

Competitive Landscape and Positioning

The vehicle auction and remarketing industry is competitive, with Copart facing rivals like IAA, Inc. (IAA) and KAR Auction Services, Inc. (KAR), as well as smaller regional players, large vehicle dismantlers, and emerging digital platforms. Copart's competitive positioning is primarily defined by its technological leadership, extensive physical footprint, global buyer base, and operational efficiency, particularly in handling high-volume salvage vehicles.

Compared to its main publicly traded competitors, Copart generally exhibits superior profitability metrics. Its TTM Net Profit Margin stands at 32.21%, significantly higher than typical margins for IAA (around 25-30%) and KAR (around 10-15%). This margin advantage is a direct result of Copart's highly efficient online auction platform and operational model, which allows for lower costs per transaction and higher ASPs relative to the broader used vehicle market (U.S. insurance ASPs outperformed the Manheim Index decline in recent quarters).

While precise, directly comparable market share figures for all niche competitors are not publicly detailed, management believes Copart has gained market share over many years and decades, attributing this to delivering superior net returns to clients through investments in land, technology, and operational efficiency. The company's ability to respond rapidly and effectively to CAT events is also cited as a competitive advantage, as demonstrated by its high share of CAT units sold in Florida following recent hurricanes.

Copart's competitive advantages, or moats, include its proprietary technology (VB3, Title Express, AI tools) which drives efficiency, liquidity, and seller stickiness, and its extensive network of owned facilities, which provides essential capacity and is difficult for competitors to replicate. The "flywheel effect" of its integrated buyer and seller base further strengthens its position, creating a self-reinforcing network effect.

However, Copart is not without vulnerabilities. It faces dependence on a limited number of major vehicle sellers for a substantial portion of its revenues, and the loss of a key client could have a material impact. Competition for vehicle supply and buyers remains intense. Furthermore, while expanding into non-insurance segments diversifies revenue, it also brings Copart into more direct competition with players historically stronger in those areas (like KAR in dealer wholesale), requiring upfront investment in sales forces and potentially facing different market dynamics.

Financial Performance Review

Copart's recent financial performance reflects the strength of its business model and the impact of its strategic initiatives and market dynamics. For the three months ended April 30, 2025 (Q3 FY25), total service revenues and vehicle sales reached $1.21 billion, an increase of 7.5% compared to the same period last year. For the nine months ended April 30, 2025, total revenues were $3.52 billion, up 11.0% year-over-year.

Service revenues, the primary driver, grew by 9.3% in Q3 FY25 to $1.03 billion and by 12.9% in 9M FY25 to $3.01 billion. This growth was fueled by a combination of increased volume (especially in International and non-insurance US segments) and higher revenue per car (particularly in the US). Vehicle sales, which represent a smaller portion of revenue, saw a slight decrease of 2.1% in Q3 FY25 to $176.88 million but a 1.9% increase in 9M FY25 to $509.41 million, influenced by volume and price changes and shifts to the consignment model internationally.

Operating expenses increased, with facility operations rising 11.6% in Q3 FY25 ($489.74 million) and 17.5% in 9M FY25 ($1.48 billion), partly due to higher volumes, increased costs per car, and significant one-time CAT-related expenses ($56 million in 9M FY25). General and administrative expenses also increased by 14.1% in Q3 FY25 ($100.72 million) and 26.8% in 9M FY25 ($305.80 million), reflecting investments in sales force expansion (Purple Wave, Blue Car/Dealer) and platform services (compliance, system implementations), as well as higher labor and third-party costs.

Despite increased expenses, operating income remained strong, reaching $451.55 million in Q3 FY25 (up 3.3%) and $1.28 billion in 9M FY25 (up 5.8%). Net income attributable to Copart, Inc. was $406.61 million in Q3 FY25 (up 6.4%) and $1.16 billion in 9M FY25 (up 11.5%), benefiting from higher operating income and increased interest income from investments in US Treasury Bills ($129.07 million in 9M FY25). Diluted EPS was $0.42 in Q3 FY25 and $1.18 in 9M FY25.

Profitability margins remain robust, with a TTM Gross Profit Margin of 44.51%, TTM Operating Profit Margin of 35.80%, and TTM Net Profit Margin of 32.21%. While Q3 FY25 operating margin was 37.0% compared to 38.0% last year, reflecting cost pressures and investments, the overall profitability profile remains strong.

Copart maintains a healthy balance sheet and strong liquidity. As of April 30, 2025, cash, cash equivalents, and restricted cash totaled $2.37 billion, and total current assets were $5.36 billion, significantly exceeding total current liabilities of $657.13 million, resulting in a TTM Current Ratio of 8.16. The company also has access to a $1.25 billion Revolving Loan Facility, with no outstanding borrowings.

Net cash provided by operating activities was $1.36 billion for the nine months ended April 30, 2025, demonstrating strong cash generation. Free cash flow (operating cash flow minus capital expenditures) was $572.92 million in Q3 FY25 and $961.57 million TTM, providing ample capital for investments, potential acquisitions, or shareholder returns (though no dividends have been paid since 1994, and no share repurchases occurred in the recent nine months). The company's conservative capitalization, with a TTM Debt/Equity ratio of 0.01, is viewed as a distinct competitive advantage.

Outlook and Strategic Initiatives

Copart's management maintains a positive long-term outlook, grounded in the expectation of ongoing organic industry growth. The primary driver is the anticipated continuation of the secular rise in total loss frequency, which they believe will more than offset the long-term trend of declining accident frequency per mile driven. This outlook is supported by demographic trends (population growth) and increased vehicle miles traveled.

Strategically, Copart is focused on several key areas to capitalize on this outlook and enhance its market position:

1. Expanding Physical Capacity: Continued investment in acquiring and developing new facilities and expanding existing ones is crucial to support volume growth and manage volatility from CAT events.
2. Enhancing Technology: Ongoing development and deployment of technology (VB3 enhancements, AI tools, Title Express, enterprise OS) aim to improve operational efficiency, enhance the value proposition for sellers and buyers, and maintain a competitive edge.
3. Growing Non-Insurance Segments: Investments in sales forces and service offerings for Blue Car, Dealer, and Cash for Cars are expected to drive meaningful growth in these segments over the next 12-24 months, contributing to revenue diversification and auction liquidity.
4. Disciplined M&A: The company remains focused on opportunistic acquisitions and strategic partnerships that align with its strategy and meet valuation hurdles, such as the Purple Wave acquisition to expand into heavy equipment.
5. Operational Efficiency: Efforts are underway to optimize costs, including managing G&A expenses, which are expected to partially recede over the next 12 months after recent investments, positioning the business for stronger operating leverage.

Management emphasizes a multi-decade investment horizon and an unwavering approach to capital allocation, prioritizing investments that grow and diversify its marketplace businesses and enhance service levels. While specific quantitative financial guidance for future periods is not provided, the narrative points to continued investment in core capabilities and strategic expansion as the path to long-term profitable growth.

Risks and Challenges

Despite its strong market position and favorable industry trends, Copart faces several risks and challenges that could impact its future performance.

• Dependence on Major Sellers: A significant portion of revenue comes from a limited number of major vehicle sellers, and the loss of one or more could materially affect results.
• Competition: The industry is highly competitive, and rivals could gain market share or engage in pricing pressure.
• Macroeconomic Factors: Fluctuations in fuel prices, commodity prices, and used car values can impact auction selling prices and total loss frequency. Adverse economic conditions could reduce miles driven, accident frequency, or buyer demand.
• Weather and Seasonality: Mild weather reduces vehicle supply, while severe weather, though increasing volume, can strain capacity and lead to abnormal expenses.
• International Operations: Operating in multiple countries exposes Copart to risks from currency fluctuations, differing regulations, political instability, and integration challenges.
• Regulation: Changes in laws regarding titling, environmental protection, import/export, or business operations could increase costs or limit activities. The ongoing DOJ investigation into potential money laundering violations poses a significant risk of costs, penalties, and reputational harm.
• Technology Risks: Disruptions to IT systems (including cyber-attacks), inability to protect intellectual property, or failure to adapt to rapid technological changes could harm the business.
• Growth Management: Rapid expansion through acquisitions and new facility development requires effective management of personnel, systems, and operations.
• Labor and Logistics: Problems with independent subhaulers or the company fleet (e.g., fuel costs, accidents) could increase operating expenses.

These risks highlight the dynamic environment in which Copart operates and underscore the importance of its operational resilience, strategic adaptability, and disciplined management in mitigating potential adverse impacts on the investment thesis.

Conclusion

Copart's investment narrative is a compelling story of a technology-driven marketplace leader positioned to benefit from powerful, long-term industry trends. The secular rise in total loss frequency, fueled by increasing vehicle complexity, provides a fundamental tailwind for its core insurance business. By leveraging its proprietary VB3 auction platform, extensive physical footprint, and growing suite of technology-enabled services like Title Express, Copart creates a liquid global marketplace that maximizes value for sellers and attracts a diverse buyer base.

Recent financial results demonstrate the company's ability to translate these advantages into solid revenue growth, robust profitability, and strong cash flow generation, even while absorbing costs associated with strategic investments in capacity expansion, technology, and diversification into non-insurance segments. While challenges exist, including intense competition, macroeconomic volatility, and regulatory risks, Copart's disciplined approach to capital allocation, focus on operational excellence, and continuous innovation position it favorably for continued growth. The ongoing expansion into areas like Blue Car and heavy equipment, coupled with the reinforcing "flywheel effect" of its marketplace, suggests a resilient business model with multiple avenues for future value creation. For investors seeking exposure to a market leader capitalizing on durable industry dynamics, Copart's blend of technological edge, physical infrastructure, and operational prowess presents a compelling case.