Is CarParts.com a Buy?

Is CarParts.com Stock a Buy? Over the last two years, online auto parts retailer CarParts.com (NASDAQ:PRTS) has more than doubled its revenues and massively expanded its distribution capabilities. The company, which began as a cluster of unrelated auto parts websites, has proven that it can deliver parts quickly and efficiently to DIY mechanics across the United States.

 

Since peaking in 2021, the stock has sold off by 55.9 percent over the last year, even as the company is rolling out new and potentially very lucrative programs. This leaves the stock as a decent candidate for a high-growth portfolio. So, is now the time to buy?

In Q1, net sales rose by 15 percent year-over-year to reach $166.1 million. The addition of an extra distribution center aided in this growth, as did persisting strong demand for parts.

 

Earnings were much stronger than expected, with the company reporting earnings of $0.04 per share against a consensus estimate that projected a loss of $0.05.

Gross profit was also quite impressive for CarParts.com in Q1, advancing 24 percent to $61.2 million. Gross margin was 36.8 percent.

 

The company also took the opportunity to position itself for even larger volumes of business by growing its inventory to a record level of $157.9 million.

 

As of now, most CarParts.com customers are do-it-yourself mechanics. One of the biggest factors in the company’s growth going forward, though, is likely to be the advent of its do-it-for-me (DIFM) program.

 

Set to roll out over the next 12 to 18 months, the DIFM program would allow customers to order repairs for their cars through an app.

 

Under this model, a certified mechanic would come to the customer’s home with the necessary parts and repair the vehicle without the customer having to take it to a shop.

 

This program has enormous potential to disrupt an industry that has been largely unchanged by technological advances in terms of its service model.

 

The US auto service market is expected to be worth $75 billion by 2026, almost all of which is a potentially addressable market for the DIFM program.

 

By introducing a much more convenient way for consumers to repair their vehicles, CarParts.com could massively increase its revenues and sell an even larger volume of parts.

 

From a value perspective, CarParts.com looks relatively cheap when its future growth potential is taken into account.

The stock trades at a price-to-sales ratio of 0.68, and its debt-to-equity ratio is comfortably low at 0.14.

 

Given that the company is projected to achieve long-term growth rates of between 20 and 25 percent, the stock is priced quite attractively.

 

Analyst forecasts give CarParts.com a median target price of $15 over the next 12 months. This represents a 94.6 percent upside over the current price.

 

Encouragingly, the lowest price target among 5 analyst forecasts is $12, more than 50 percent above the current price.

 

CarParts.com’s biggest probable risk is that it could take a while to reach its full potential. Both the DIFM program and the expanded distribution will take time to pay for the investments needed to create them. As a result, CarParts.com is by far most suitable as a long-term investment.

 

According to some schools of thought, CarParts.com could also be harmed by radical changes in consumer behavior with regards to car ownership. As ridesharing and related services grow, the argument goes, fewer and fewer consumers will choose to own vehicles.

 

By some of the more audacious forecasts, this could ultimately lead to a drop in ownership rates by as much as 80 percent. While this extreme scenario seems highly unlikely, it’s worth keeping in mind that consumer behavior could change and dampen demand for auto parts.

 

Manufacturers are also making it increasingly difficult for third-party mechanics and DIYers to repair vehicles. Fights over the right to repair have been prominent in recent years, and it’s not yet clear how legal battles in this area will resolve.

 

Long-term, attempts by manufacturers to push consumers toward dealership mechanics could make it more difficult for CarParts.com to provide service through the DIFM program.

 

CarParts.com is a major success story in disrupting a conservative legacy industry with new technology.

 

The company began as 17 unrelated and uncoordinated websites and today is one of the largest sellers of auto parts in the United States. Growth in the core business segment of supplying parts to DIY mechanics appears to still have steam behind it, meaning that the company should be able to continue expanding organically for some time.

 

The real value of CarParts.com, however, is in future increases in customer convenience. The DIFM program the company plans to roll out over the next year could allow it to capture a gigantic market for automotive services. More than 70 percent of American consumers have their cars repaired by third-party mechanics, which means that the program has an enormous potential customer base.

 

CarParts.com is also rapidly expanding its same-day delivery capabilities.

 

With its six present and soon-to-be-completed distribution centers, the company can move parts to just over half of the United States within a single day. Long-term, management plans to expand this to 80 percent or more.

 

Given that customers often need parts on short lead times, this capacity will make CarParts.com a natural choice for DIY mechanics needing to repair their vehicles quickly.

 

A final consideration is the fact that the company has kept its debts low and achieved very respectable margin levels. This leaves it in an excellent position for future growth and profitability. The company’s cash position is a bit thin at just $25 million on hand, but its other financials are strong enough to make this less concerning.

 

Overall, CarParts.com is likely a good buy for investors seeking high-growth, high-return stocks. The company certainly isn’t without its risk, but its current performance, future growth projections and disruptive approach to auto service are all compelling arguments in its favor.

 

If you’re comfortable with taking on higher risk in exchange for potentially high rewards and holding shares for a long period of time, CarParts.com could be a very good stock to add to your portfolio.

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