Sometimes, turnaround stories require a bit of patience: but they make for great holds while the rest of the stock market is exceedingly expensive. And with record-breaking S&P 500 multiples, I'm positioning more and more of my portfolio into these value-oriented rebound plays.
CarGurus (NASDAQ:CARG) is a stock that I'm particularly fond of. The online car marketplace has shed its car-flipping business and refocused back on its dealer advertising network. Having restored its marketplace business back to growth, the stock is now up ~7% year to date, lagging behind the S&P 500 but carrying plenty of forward potential.
With growth in paid dealer counts, the bull case looks bright, and at reasonable multiples
I last wrote a bullish opinion on CarGurus in April, when the stock was still trading in the ~$22 range. Since then, the company has released tremendous Q1 results that showed two very important things: acceleration in marketplace revenue growth, and a return to growth in the number of paid dealers in the company's network again. With CarGurus solidly positioned for expansion in its marketplace platform, I'm reiterating my buy rating on this stock - especially as the rest of the market has climbed up to nosebleed levels.
As a refresher for investors who are newer to this stock, here is my updated long-term bull case for CarGurus:
- CarGurus has made itself essential for car dealerships. Even before adding CarOffer and Instant Max Cash Offer, CarGurus was long considered by dealerships to be a necessary partner due to the amount of web traffic flowing through its site nationwide. By adding the ability for dealerships to buy cars through the CarGurus network as well, CarGurus has effectively just doubled its wallet share within the used-car industry.
- Reliable recurring revenue streams that have a proven history of working through down cycles. CarGurus enjoys a steady stream of fee income from its paying car dealerships. Quarterly average revenue per car dealership also continues to rise. CarGurus has also proven itself capable of managing through downturns, swiftly acting to support struggling dealership customers in the immediate aftermath of COVID but now recovering even after those actions.
- CarGurus remains the #1 site for used-car research in the U.S., and by a wide margin. By default, car dealerships (or any business, really) will go where the eyeballs are, and CarGurus has cemented its place as the leading site to do research before buying a used car.
- Traffic growth- Monthly active users and web sessions continue to rise, showcasing CarGurus' popularity with consumers.
- Improving wholesale results- CarGurus has now fully integrated CarOffer into its business and stabilized its profitability, giving the company a huge edge in the dealer-to-dealer network and expanding its reach.
In spite of all of these strengths, and also in spite of the stock's recent rally, CarGurus still trades at quite cheap multiples. At current share prices near $25, CarGurus trades at a market cap of $2.63 billion. After we net off the $246.3 million of cash on CarGurus' most recent balance sheet, the company's resulting enterprise value is $2.38 billion.
For next fiscal year (FY25), Wall Street analysts have a consensus revenue estimate of $967.1 million for the company, representing 10% y/y growth (after a -4% expected decline this year, primarily driven by tougher comps from the intentional shrinkage of the wholesale business). If we conservatively assume a 23% adjusted EBITDA margin on that revenue (in line with Q1 results, which showed ~6 points of y/y adjusted EBITDA margin expansion), adjusted EBITDA next year would be ~$222 million.
This puts CarGurus' valuation multiples at:
- 2.5x EV/FY25 consensus revenue
- 10.7x EV/FY25 estimated adjusted EBITDA
To me, these multiples are quite a bargain for a company that has returned its focus to a high-margin, recurring-revenue internet advertising business. Stay long here and keep riding the recent rebound higher.
Q1 download
Let's now go through CarGurus' latest quarterly results in greater detail. The Q1 earnings summary is shown below:
Total revenue declined -7% y/y to $215.8 million, which as previously mentioned is driven primarily by planned declines in product and wholesale revenue. However, marketplace revenue growth of 12% y/y accelerated versus 10% y/y growth in Q4.
Perhaps even more encouraging to see in the quarter: CarGurus' count of paid dealers returned to sequential growth, adding 240 net-new dealers in the quarter to end at 31.2k total in the customer base, reversing multiple quarters of sequential decline. Not only that, but average quarterly revenue per dealership also increased 14% y/y to $5,664, which the company chalked up to signing up new dealers and renewing existing dealers at higher prevailing market rates.
But it's not just on the dealer side that CarGurus is winning: the company is also growing its footprint with consumers as well. Average monthly sessions in the quarter grew 7% y/y to 108 million, and average monthly site visitors also grew:
Speaking to the factors that are driving consumer traffic on the Q1 earnings call, CEO Jason Trevisan noted as follows:
Our app continued to be the number one automotive app in terms of downloads across iOS and Android and one of our fastest-growing channels. Our app generated more than a quarter of total leads and app users averaged more than three sessions per week with strong engagement and loyalty. Approximately 70% of app users ultimately registered with us, allowing us to offer increasingly customized user experiences with recommendations tailored to their preferences and needs.
We continue to offer our consumers the largest selection of used and new cars. In the first quarter, we grew our available listings by 30% year-over-year, and we ended the quarter with approximately 20% more available inventory than our next closest automotive competitor. We ended the quarter as the most visited automotive marketplace with 57% more total visits than our next closest competitor, and 48% of our monthly unique visitors did not visit our leading competitors' websites. Our net promoter score remained extremely high with 90% of buyers stating that they would recommend CarGurus to a friend."
Profitability also soared in the quarter, with adjusted EBITDA growth of 24% y/y to $50.4 million outpacing revenue growth, and adjusted EBITDA margins rising six points y/y to 24%.
Key takeaways
Shunned for years by a slower dealer market in the immediate aftermath of the pandemic, CarGurus is now roaring back with a clear focus on expanding its marketplace business, which is gaining both new dealerships as well as substantial new consumer traffic levels. With the stock continuing to trade at discounted multiples, continue holding on here for more upside.
Gary Alexander
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of CARG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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