Is CarGurus Stock A Buy?

CarGurus Inc (NASDAQ:CARG) is an online marketplace for new and used cars. The company was founded in Massachusetts in 2006 by CEO and TripAdvisor Co-Founder Langley Steinart. It was privately owned until a $150 million IPO in October 2017.

CarGurus lets you compare local listings and participate in user forums to get the best information about buying your next car. But in a world transitioning from commuting to work to virtual, is CarGurus stock a Buy? 

CARG share price took a hit when the world changed and this could represent a value for potential investors. The question is whether it has the resources and business savvy to navigate a rough market.

We’ll examine whether demand will resume for its service or whether this stock will be a slow motion car crash.

CarGurus Solves The Car Buying Hassle

Let’s face it – buying a car is a hassle. Private owners and dealers alike gloss over any defects or problems, while focusing on the sale.

State and federal lemon laws exist, but they provide a very minimal amount of protection. A car could last a week, or it could last 20 years. It’s a combination of manufacturing and user maintenance that makes that difference.

CarGurus connects buyers, dealers, private sellers, mechanics, enthusiasts, and other members of the car community together.

It serves as a resource to check and double check every aspect of a vehicle you’d like before you purchase. For example, some people avoid specific years of Nissan cars because of possible transmission issues.

The fact is everyone’s lifestyle and driving habits and preferences are unique. That’s why these online forums, marketplaces, and price-checking tools are great resources to have. However, the company did manage to survive the stock market crash largely intact and could be poised for a rebound.

Is CarGurus Stock A Buy?

CarGurus market capitalization has been oscillating around the $3 billion mark at last count.

That doesn’t seem excessively high in a world where Tesla market cap has made Elon Musk the second richest man in the world, albeit temporarily.

A closer examination highlights that this valuation may be reasonable. After all, its P/E ratio is between 40 and 45 – pretty high.

CARG share price is right in the middle of its 52-week low of $14.25 and high of $40.37, but still off from the $50-$60 range it traded at in 2018.

The company averages nearly 50 million unique monthly visitors, with over 30,000 dealers paying for marketing services on the platform.

This helped bring in $589 million of revenue in 2019. However, 2020 lockdowns great slowed the automotive industry’s revenues, which lost an estimated 22 percent in annual sales (approximately 20 million cars) during the crisis.

And that’s just one part of the problem; there are likely more losses coming through supply chain shutdowns.

Of course, it’s unclear how this will affect CarGurus directly over the next few years, as it has a different business model than automakers. Let’s examine the risks next.

Will CarGurus Stock Fall?

Stocks like Ford (F), GM (GM), and Tesla (TSLA) received a big boost when hopes of a return to a more normal economic environment made headlines thanks to results fro vaccine manufacturers clinical trials.

In fact, some traders earned an astonishing 3x-5x return on Tesla in a single year when the economy went into a recession.

Meanwhile tech stocks, like Zoom (ZM) and unfortunately CarGurus failed to hold massive gains. The big question is whether these tools and platforms that cater to a virtual world will still be used when the world returns to some sense of normalcy. 

Adding to the problem, both new and used car sales were down across the board. This puts CarGurus at the mercy of several factors it simply can’t control. Ad revenue increased but it’s a small revenue stream compared to subscriptions, which decreased.

However, it should be noted the company has no debt on its books and holds nearly $250 million in cash and cash equivalents. And its cash flow increased to $73.9 million from $23.8 million in the same quarter a year ago. The only real problems this company faces are market perceptions and competition.

CarGurus Competition Is Fierce

CarGurus isn’t alone in the car sales marketplace. Not only do all new and used car dealerships have their own websites, but they also advertise on platforms like AutoTrader, TrueCar (TRUE), Cars.com (CARS), Kelly Blue Book, Carvana, Edmunds, and Carfax.

This is a very crowded marketplace, and the company needs to continue providing results for car manufacturers at the end of the day. Even companies like eBay (EBAY) and Amazon (AMZN) can muscle in on the company’s bottom line.

Another issue it faces is a possible drop in demand for automobiles over the next year or two. Government stimulus aside, the economy for the foreseeable future is going to show the effects of the pandemic.

There’s a distinct chance consumers will slow down their car buying, which already only happens every 6-8 years, versus 3-4 years automakers prefer.

If that trend continues much longer, it’ll put the squeeze on the entire auto market.

Is CarGurus Stock A Buy? The Bottom Line

CarGurus is a popular car marketplace where users can buy, sell, trade, get maintenance information, price match, and more. It’s a valuable virtual tool in a struggling auto industry that’s filled with a lot of strong competition.

The company’s main revenue source are paid subscribers, while advertising revenue is a tenth of that revenue, albeit growing fast.

If the company can leverage its cash reserves, it can possibly pick off some competitors through acquisition to consolidate market share and command higher prices during what’s sure to be a cold winter market.

It has no debt on its books, and that’ll should certainly help it leverage its cash reserves and free cash flow to scale over the longer term. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.