DA Davidson cuts Cars.com target to $14.50, maintains Buy

On Thursday, DA Davidson analysts adjusted their valuation of Cars.com (NYSE:CARS), reducing the price target to $14.50 from the previous $21.00, while still endorsing the stock with a Buy rating. The adjustment followed the company’s mixed financial results for the fourth quarter and a cautious initial forecast for both the first quarter and the full calendar year 2025. According to InvestingPro analysis, the stock appears undervalued, with strong fundamentals including a healthy 67.5% gross profit margin and robust free cash flow yield.

The analysts noted that Cars.com’s core Dealer revenues fell short of expectations due to another quarter of declining numbers of paying dealers. However, the high-margin Original Equipment Manufacturer (OEM) and National advertising revenues surpassed expectations, contributing to a slight outperformance in consolidated EBITDA predictions. The company’s EBITDA stands at $159.2 million for the last twelve months, with InvestingPro data showing a solid current ratio of 1.79, indicating strong ability to meet short-term obligations.

The reduction in price target comes as the stock experienced a sell-off on Thursday. Investors seem to be finding it difficult to reconcile Cars.com’s performance with the aggressive growth projected in its annual outlook. The company’s forecast suggests a significant revenue growth acceleration in the second half of 2025, with expectations of approximately 6.8% growth compared to around 1.8% in the first half. The guidance for the first quarter indicates a slight year-over-year revenue decrease of around 0.4%. Recent InvestingPro data reveals the stock is trading near its 52-week low, with a beta of 2.15 indicating higher volatility than the broader market.

DA Davidson’s commentary reflects a cautious optimism for Cars.com’s ability to achieve its ambitious full-year targets. The analysts’ maintained Buy rating indicates they still see potential value in the stock despite the current challenges and the lowered financial estimates. With an EV/EBITDA ratio of 8.68 and positive earnings forecasts, detailed financial analysis available through InvestingPro suggests the company maintains solid fundamentals despite recent market pressure.

Cars.com’s fourth-quarter performance and subsequent stock movement highlight the company’s current struggle to increase its paying dealer base, a critical factor for its revenue generation. The company’s outlook for the coming months will be closely watched by investors as they assess the potential for Cars.com to realize the growth acceleration later in the year.

In other recent news, Cars.com Inc. reported fourth-quarter earnings that did not meet analyst expectations, with adjusted earnings per share at $0.49, falling short of the anticipated $0.56. The company’s revenue for the quarter was $180.43 million, slightly below the $183.9 million forecast and only a small increase from $179.6 million in the same period last year. Looking ahead, Cars.com projected first-quarter revenue between $178 million and $181 million, which is below the $184.9 million expected by analysts. For the full year 2025, the company anticipates revenue between $745 million and $755 million, also falling short of the $757.7 million consensus estimate.

The CEO, Alex Vetter, noted a 15% year-over-year growth in OEM and National revenue for Q4, while subscription-based Dealer revenue saw a 1% decline. Cars.com also expanded its AccuTrade Connected product to approximately 1,000 subscribers and announced a new $250 million share repurchase authorization. For the full year 2024, the company reported record revenue of $719.2 million, marking a 4% increase year-over-year, although net income decreased to $48.2 million from $118.4 million in 2023 due to a previous tax valuation allowance release. Despite these developments, the company’s results and future outlook led to a significant stock decline, reflecting investor disappointment.

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