It seems customary to put valuations on high-growth internet stocks that are absolutely insane. Yet CarGurus Inc. (CARG, Financial) seems to get different treatment. Even though it has grown from $98 million in revenue in 2015 to over $1.6 billion in 2022, all while generating very good operating cash flow on the back of 51% gross profit, the stock remains priced at just 2 times revenue and less than 10 times current earnings.
Company overview
CarGurus was founded in 2006 by Langley Steinert, who was also a co-founder of TripAdvisor (TRIP, Financial), a popular travel website. As of 2022, the company has listings for over 6 million new and used cars from more than 40,000 dealerships and 250,000 private sellers across the U.S., Canada and the United Kingdom.
The company's main value proposition is its platform that helps users find great deals from top-rated dealers, and if you are selling, get an offer in a matter of minutes.
Its search algorithms analyze the price, condition, history and other aspects of a car listing to rank the best deals. Apart from its primary marketplace, CarGurus has delved into other automotive-related services, including financing solutions and a digital wholesale auction platform. One distinctive feature is its transparency about car prices. It labels the listings as either "overpriced," "fair price," "good deal" or "great deal" based on how the listed price compares to the estimated market value of the car.
CarGurus primarily earns its revenue from dealers who subscribe to its premium services. By subscribing to premium services, dealers get increased visibility for their listings, better positioning in search results, access to advanced analytics about their inventory performance and other tools to help them sell cars more effectively. Apart from its primary marketplace, the company has delved into other automotive-related services, including financing solutions and a digital wholesale auction platform.
Market position and audience
There are plenty of competitors, but the company has both the largest dealer network with over 31,000 dealers globally and the largest consumer audience of any automotive marketplace. Attention is brand power online and CarGurus consistently ranks number one in website traffic to an automotive website according to SimilarWeb. In fact, from May to July, CarGurus.com had 145.5 million visitors. The next closest competitor, Cars.com, had 111.3 million visitors.
Competitive landscape
CarGurus competes with a number of other online automotive marketplaces. In general, the company stands out with its pricing analytics, deal ratings, search filters and vast dealer and vehicle inventory. Its tools and data help consumers negotiate better and find good value, giving it an edge over other car shopping sites.
The company tends to have more inventory listings, especially from smaller, independent dealers. Its pricing analysis tools and deal ratings also give it an edge over Autotrader. CarGurus has a larger dealer network and more used car listings compared to Cars.com. Its focus on helping users find good deals also differentiates it. CarGurus offers more advanced search filters, price analysis and inventory than TrueCar. It also costs less for dealers to advertise on its platform.
CarGurus provides pretty robust price rating analytics and has a larger dealer network than Edmunds. Its Instant Market Value tool is also just as or more accurate for pricing. Against Kelly Blue Book, the company has superior inventory and makes it easier for users to search for and compare deals. Kelly Blue Book focuses more on pricing data.
Partnerships with major dealers
Since CarGurus makes money through paid subscriptions and advertising from dealerships, big dealers like AutoNation Inc. (AN, Financial) and CarMax Inc. (KMX, Financial) actually supply inventory to be listed on the CarGurus marketplace.
AutoNation is the largest automotive retailer in the U.S. with over 300 dealerships nationwide. CarGurus gets a significant amount of its new and used car listings from AutoNation dealer inventories.
CarMax is the largest used car retailer in the U.S. with over 200 physical dealership locations. Many CarMax lots list their used vehicle inventory on CarGurus to reach online car shoppers.
These two relationships are a huge advantage. As a third-party platform, CarGurus does not sell cars directly. It partners with and gets inventory from dealer groups, as well as thousands of other new car dealers and independent used car lots.
Industry challenges
After a boom in used car prices during the Covid-19 pandemic, the market has cooled off drastically. Now the number of cars with negative equity is rising. Today, two out of 13 people are making car payments of $1,000 or more and new financing terms include an 84 months payment plan, according to Edmunds. More importantly, outstanding auto loans have surpassed $1.5 trillion.
The data shows new car sales dropped during the recession years of 2008 and 2009, but have rebounded since then, hitting recent peaks around 17 million per year before the impacts of the pandemic and supply chain issues. And while used car sales have been steadily high for 20 years, ranging from 36 million to 43 million annually, 2022 saw a significant drop in new car sales due to inventory shortages while used car sales declined as prices rose.
With that said, there are more than 230 million people with a drivers license in the U.S. The biggest risk is whether we will be driving in 20 years at all. If transportation as a service becomes our way of life thanks to further improvements in artificial intelligence technology, then the cheaper and safer option will win. For now, I do not see that happening.
Future potential
First and foremost, people love cars. For investors in CarGurus, there is a lot to be excited about. It does not take on debt at all and has more than $453 million in cash. Compared to Carvana (CVNA, Financial) that has spent a ton to build structures to house cars, CarGurus simply capitalizes on attention to help sell cars faster for its dealer network. It does not want to disrupt; it wants to optimize. And, CarGurus has a big lead in terms of attention than its direct competitors.
The company has suffered a drop in sales during the last 12 months with revenue likely to come in shy of $1 billion this year after a record in 2022. That said, it is more committed to profits and expects earnings to be around $1.10 per share. It also has incredible margins, with net margins in the last 12 months above 25%, return on total assets above 28% and return on equity above 50%. It generates over $260 million in cash from operations.
What is really the most important here is the total addressable market relevant to CarGurus, which facilitates the transactions, is estimated to be in the range of $1.3 trillion to $1.5 trillion in the U.S. alone, providing substantial room for continued growth and expansion. The total number of cars that are bought because they are listed on CarGurus.com is not available; however, in the company’s latest presentation, it had 44.6 million average monthly visitors who spent 24% more time on its site than competitors and were three times more likely to buy. Dealers will continue to spend money to have reach across the internet as that is where nearly 100% of people start their search for a new car.
Is it likely that CarGurus will remain in the leadership position? I think so.
