Is AAP a good stock to buy? We came across a bullish thesis on Advance Auto Parts, Inc. on DeepValue Capital’s Substack. Since the thesis was published on June 18th, AAP shares have pulled back as weaker DIY demand and softer sales overshadowed margin gains, creating a near-term hurdle even as the recovery since August
Is AAP a good stock to buy? We came across a bullish thesis on Advance Auto Parts, Inc. on DeepValue Capital’s Substack. Since the thesis was published on June 18th, AAP shares have pulled back as weaker DIY demand and softer sales overshadowed margin gains, creating a near-term hurdle even as the recovery since August offers some encouragement for the turnaround case. In this article, we will summarize the bulls’ thesis on AAP. Advance Auto Parts, Inc.’s share was trading at $45.73 as of October 29th 2026. AAP’s trailing and forward P/E were 25.33 and 11.81 respectively according to Yahoo Finance.
This isn’t the first time we see an auto parts supplier pitched as a great investment. Unfortunately, AAP shares lost 2.97% of their value over the last 12 months. Comparable stocks like Genuine Parts Company lost 3.86% of their value during the same period. Why are auto parts stocks declining and does AAP’s recovery since August make this a good time to buy?
Genuine Parts Co. (GPC): Here’s Why Gabelli Sees Value in This Auto Parts Stock
In August, we published an article about Q2 Earnings Blowout: 8 Stocks Exceeding Analyst Estimates, which featured AAP. AAP returned 7.39% since then, giving investors some encouragement despite its weaker annual performance. So, investors who backed AAP after that earnings report have been rewarded. This article explains why hedge funds were bullish on AAP. Before getting into our analysis, let’s take a look at the business and why some investors like the stock so much.
Advance Auto Parts, Inc. (NYSE:AAP) is one of the largest aftermarket auto parts retailers in North America, running roughly 4,300 stores and supporting about 800 independently owned Carquest locations. The company brought in $8.6 billion in revenue in 2025, but years of operational missteps and lost customers have dragged the stock down about 73%, from a 2022 high near $220 to around $58 today.
The turnaround story centers on CEO Shane O’Kelly, who took over in September 2023 and has been simplifying the business while working to win customers back. First-quarter 2026 comparable-store sales grew 3.5%, the strongest showing in five years, while profitability improved sharply and free cash flow is expected to turn positive this year. Even so, with the stock trading at roughly half its historical valuation, investors remain unconvinced (see AAP’s Q2 results: free cash flow improved, but comparable sales stayed weak).
The bullish case rests on steady demand for auto parts and Advance Auto Parts, Inc. winning back professional customers it lost to stronger competitors. More than 90% of its revenue comes from non-discretionary maintenance and repair work, and about 38% of the U.S. vehicle fleet currently falls into the six-to-14-year age range, where repair needs are highest. That share is expected to approach 40% by 2028, meaning demand for parts should keep growing. Advance splits its sales about evenly between professional repair shops and do-it-yourself customers, and with the overall vehicle fleet growing around 1% a year and the aftermarket parts market growing roughly 5.2%, simply getting parts to customers faster and more reliably gives the company room to win back lost business.
Much of management’s work has focused on undoing the complications from a roughly $2 billion acquisition in 2013 that doubled the company’s store network but left its distribution system inefficient. Since O’Kelly took over, Advance Auto Parts, Inc. (NYSE:AAP) has sold its Worldpac division for about $1.5 billion, closed around 700 underperforming stores, and cut its distribution centers from 38 down to 16, all while speeding up delivery times to professional customers. In-stock availability has climbed from the low-90% range into the high 90s, and a network of 35 regional hubs now gives stores same-day access to a much broader range of parts. That progress shows up in mid-single-digit sales growth from professional customers and a return to positive sales from DIY shoppers. Still, rivals O’Reilly Automotive and AutoZone posted comparable sales growth of 8.1% and 4.1% respectively, showing Advance Auto Parts, Inc. still has ground to make up.
A bullish valuation model assumes the company can generate about $450 million in normalized annual free cash flow, which at a reasonable valuation multiple would put its equity worth at around $110 per share, roughly 90% above the current price near $58. That target multiple is still well below the multiple the stock traded at, on average, over the decade before its troubles began. A more cautious scenario assumes revenue slips modestly, cash flow margins stay thin, and the market continues to value the stock conservatively.
Execution risk is the key concern. Profitability collapsed from a 9.8% operating margin in 2022 to essentially breakeven in 2023 and 2024, far below the roughly 19% to 20% margins that O’Reilly Automotive and AutoZone generate. The good news is that margins are recovering: they expanded meaningfully in 2025, with further improvement guided for 2026 that would bring operating margin to around 4% to 4.5%. Gross margin sits near 44% and is expected to edge higher, while cost controls are also helping the bottom line. Management’s longer-term goal of a 7% operating margin has been pushed out from 2027 to a more general “medium-term” timeframe.
Another risk for the stock is that shorter supplier payment terms absorb cash needed for the turnaround. Advance relies on financing programs that let participating suppliers receive early payment from banks while it pays invoices on agreed terms. Its annual report warns that reduced bank participation could shorten those terms and hurt cash flow. If Advance must pay for inventory sooner, more cash would be tied up in stocking stores even as sales and margins improve. That would leave less funding for store upgrades, distribution improvements, and debt reduction. A large cash balance cushions this risk but does not eliminate it. In our opinion, the valuation recovery becomes harder to justify if improving profits fail to produce the free cash flow investors expect.
On the balance sheet, debt levels sit within management’s target range, though they remain higher than credit rating agencies would like, keeping the company below investment grade. Advance holds more than $3 billion in cash, which provides some cushion, though longer-term risks include the slow rise of electric vehicles, which need less maintenance, and continued competition from online retailers.
Hedge fund positioning shows a mixed but improving signal. As per our database, 38 hedge fund portfolios held Advance Auto Parts, Inc. at the end of the second quarter, up from 34 in the previous quarter. This increase suggests institutional investors are warming to the turnaround story, even as they wait for more evidence that the recovery can last. By comparison, O’Reilly Automotive (NASDAQ:ORLY) was held by 69 hedge funds, up from 67, AutoZone (NYSE:AZO) was held by 62 hedge funds, down from 63, and Genuine Parts Company (NYSE:GPC) was held by 47 hedge funds, down from 57. Advance Auto Parts stood out with the strongest increase in hedge fund interest, followed by O’Reilly Automotive, while AutoZone saw a small dip and Genuine Parts Company faced a larger pullback, suggesting institutional enthusiasm strengthened for Advance Auto Parts despite uneven sentiment across the group.
Short interest data also paints a fairly concerning picture for Advance Auto Parts, Inc. relative to its peers. About 28.87% of Advance Auto Parts, Inc.’s float is sold short, well above O’Reilly Automotive, Inc. at 2.76%, AutoZone, Inc. at 4.01%, and Genuine Parts Company at 5.63%. This suggests Advance Auto Parts, Inc. is drawing considerably more skepticism than all three peers about its turnaround, though improving sales, margins, and cash flow could prompt short sellers to buy back shares and help push the price higher.
Valuation Analysis
AAP’s EV/EBITDA is 8.20x. O’Reilly Automotive, Inc., Genuine Parts Company, and AutoZone, Inc. trade at EV/EBITDA multiples of 19.27x, 30.69x, and 14.33x, respectively. AAP’s own EV/EBITDA was 16.47x on March 31, 2026, making its current multiple approximately 50% lower. We believe the current valuation reflects significant investor concerns about lost customers, weak margins, and the execution risks surrounding its turnaround. However, the discount appears substantial given the company’s improving profitability, although its weaker operating performance warrants a lower valuation than stronger competitors. Advance’s second-quarter 2026 operating margin increased from 1.1% to 5.1%, while diluted earnings per share rose from $0.25 to $0.90, although tariff refunds contributed to these improvements. We believe AAP can justify its current valuation without matching industry-leading margins if better product availability and cost control sustain profits beyond temporary benefits. If Advance wins back professional customers and converts its operational improvements into sustainable free cash flow, the current valuation could offer an attractive entry point despite the risks surrounding its turnaround.
Previously, we covered a bullish thesis on Advance Auto Parts (AAP) by Stock Analysis Compilation in December 2024, which highlighted the operational turnaround, stronger leadership, Worldpac sale, and discounted valuation. AAP’s stock price has appreciated by approximately 8.98% since our coverage. We believe the current valuation could offer an attractive entry point if Advance wins back professional customers and sustains free cash flow as margins recover, despite its turnaround and supplier-financing risks.
Advance Auto Parts is not on our list of the 40 Most Popular Stocks Among Hedge Funds. While AAP could offer long-term upside if it wins back professional customers and turns operating improvements into sustainable free cash flow, we believe certain AI infrastructure stocks offer far stronger long-term potential at a much more attractive entry point. If you are looking for an AI stock more promising than AAP that operates as a critical AI tollbooth and stands as the most important company in the world, check out our report about this must-own AI stock.
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