CarGurus , Inc. (NASDAQ:CARG), a leading online automotive marketplace, has demonstrated resilience and adaptability in a dynamic automotive market. The company's core marketplace business continues to show strength, while its CarOffer segment undergoes strategic refinement. This comprehensive analysis examines CarGurus' performance, market position, and future prospects based on recent analyst reports and industry trends.
Core Marketplace Performance
CarGurus' marketplace business has been a consistent bright spot for the company, delivering impressive growth and margin expansion. In the third quarter of 2024, marketplace revenue grew by 15% year-over-year to $204 million, marking the largest quarterly revenue increase since 2021. This growth has been driven by several factors, including an expanding dealer base and increased adoption of add-on products and subscription tier upgrades.
The company's dealer network has shown steady expansion, with total dealers reaching 31,684 at the end of the third quarter, representing approximately 1% year-over-year growth in U.S. dealers. This growth in the dealer base, coupled with a 14% year-over-year increase in Consolidated Quarterly Average Revenue per Subscriber Dealer (QARSD), underscores the value that CarGurus provides to its partners.
Despite challenges in the broader automotive market, CarGurus has maintained its market position. U.S. traffic share has remained stable month-over-month, and year-over-year growth in U.S. Monthly Active Users (MAUs) has accelerated sequentially, with CarGurus gaining MAU share. However, it's worth noting that U.S. monthly unique visitors and sessions saw a slight decline year-over-year, indicating potential areas for improvement in user engagement.
CarOffer Progress and Challenges
While the core marketplace business has thrived, CarGurus' CarOffer segment has faced headwinds. Digital Wholesale revenue, which includes CarOffer, declined by 34% year-over-year to $27 million in the third quarter of 2024. This underperformance has been a point of concern for analysts and investors alike.
CarGurus management has acknowledged that CarOffer's recovery is taking longer than initially anticipated. The company is actively working to refine and retool the CarOffer operations to improve its performance and profitability. Despite the current challenges, some analysts see potential upside in CarOffer if clarity on its trajectory and adoption improves.
The slower-than-expected progress of CarOffer has led some analysts to assign no value to CarGurus' digital wholesale business in their valuation models. However, they maintain that there is potential for upside if the segment's performance improves in the future.
Financial Performance and Outlook
CarGurus' overall financial performance has been strong, with the company consistently beating analyst expectations. In the third quarter of 2024, revenue reached $231 million, surpassing the consensus estimate of $224 million. Consolidated adjusted EBITDA was $65 million, also exceeding the Street's expectations of $61 million.
Looking ahead, management has provided positive guidance for the fourth quarter of 2024, projecting revenue between $219 million and $239 million and consolidated adjusted EBITDA between $72 million and $80 million. This outlook suggests continued confidence in the company's ability to drive growth and profitability.
CarGurus has also been active in returning capital to shareholders through its share repurchase program. In the second quarter of 2024, the company bought back $61.4 million worth of shares under its 2024 Share Repurchase Program, demonstrating confidence in its long-term value proposition.
Product Innovation and Adoption
CarGurus' commitment to product innovation has been a key driver of its success. The company has launched several new products that have seen strong adoption among dealers and consumers. Notable among these are the Next (LON:NXT) Best Deal Rating and Digital Deal features.
The Next Best Deal Rating has shown significant engagement, helping consumers identify attractive vehicle listings based on various factors. Digital Deal, which streamlines the car-buying process, has experienced substantial growth in paying dealer penetration.
These product innovations not only enhance the user experience but also contribute to revenue diversification and increased dealer engagement. The success of these initiatives underscores CarGurus' ability to adapt to changing market conditions and consumer preferences.
Market Trends and Industry Outlook
The automotive industry is showing signs of stabilization, with implications for CarGurus' business. The Manheim Used Vehicle Value Index (UVVI) has been declining year-over-year, indicating downward pressure on average expenditure per car. This trend could potentially impact CarGurus' marketplace dynamics and dealer pricing strategies.
Inventory levels for both new and used vehicles are trending back toward pre-pandemic levels, suggesting a normalization of industry behavior. This shift is expected to support recovery in the used and wholesale markets, which could benefit CarGurus' marketplace and CarOffer segments in the long term.
New vehicle sales rates, while still below historical levels, are showing signs of improvement. The recovery in new inventory is crucial for the health of both the used and wholesale markets, potentially creating opportunities for CarGurus to capitalize on increased transaction volumes.
Bear Case
How might the deceleration in marketplace visit growth impact CarGurus' future performance?
The deceleration in year-over-year growth for U.S. visits to CarGurus' marketplace could be a cause for concern. While the company has maintained its market position and even gained MAU share, a continued slowdown in traffic growth could potentially impact revenue generation and dealer acquisition in the future. If this trend persists, it may indicate increasing competition in the online automotive marketplace or a saturation of the target market.
To mitigate this risk, CarGurus will need to focus on improving user engagement, enhancing its value proposition to both consumers and dealers, and potentially exploring new markets or segments. The company's success in product innovation, such as the Next Best Deal Rating and Digital Deal features, will be crucial in maintaining user interest and driving traffic growth.
What risks does CarGurus face if CarOffer's recovery continues to lag expectations?
The underperformance of the CarOffer segment presents a significant risk to CarGurus' overall growth strategy. If CarOffer's recovery continues to lag expectations, it could weigh on the company's financial performance and investor confidence. The digital wholesale business was intended to be a key growth driver and diversification strategy for CarGurus, and its continued struggles may raise questions about the company's ability to expand beyond its core marketplace business.
Moreover, the resources and management attention devoted to retooling CarOffer could potentially divert focus from the high-performing marketplace segment. If CarOffer fails to show meaningful improvement in the near to medium term, CarGurus may face pressure to reevaluate its investment in the wholesale segment or consider strategic alternatives for the business.
Bull Case
How could CarGurus' product innovations drive future growth and profitability?
CarGurus' successful track record of product innovation presents a compelling case for future growth and profitability. The strong adoption of new features like the Next Best Deal Rating and Digital Deal demonstrates the company's ability to create value for both consumers and dealers. These innovations not only enhance the user experience but also contribute to increased engagement and monetization opportunities.
As CarGurus continues to invest in product development, it has the potential to further differentiate itself from competitors and strengthen its market position. New products could lead to higher QARSD, improved customer retention, and expansion into new revenue streams. Additionally, successful innovations may allow CarGurus to capture a larger share of the automotive transaction value chain, potentially leading to higher margins and profitability.
What potential upside exists if CarOffer's performance improves?
While CarOffer has faced challenges, there is significant potential upside if its performance improves. The digital wholesale market represents a large opportunity, and a successful turnaround of CarOffer could unlock substantial value for CarGurus. Improved performance in this segment would diversify the company's revenue streams, potentially leading to higher growth rates and a more robust overall business model.
If CarGurus can successfully retool CarOffer and demonstrate its viability, it could lead to a re-rating of the stock by analysts and investors. Many current valuations assign little to no value to the CarOffer business, meaning any meaningful improvement could result in upward revisions to price targets and overall company valuation. Furthermore, a thriving wholesale business could create synergies with the core marketplace, potentially driving increased dealer engagement and transaction volumes across both segments.
SWOT Analysis
Strengths:
- Strong core marketplace performance with consistent revenue growth
- Expanding dealer base and increasing QARSD
- Successful launch and adoption of innovative products
- Robust financial performance, consistently beating analyst expectations
Weaknesses:
- Underperforming CarOffer segment impacting overall growth
- Deceleration in U.S. web traffic metrics year-over-year
- Dependence on used car market conditions
Opportunities:
- Potential for significant upside if CarOffer performance improves
- Further product innovations to drive engagement and monetization
- Expansion into international markets
- Capitalization on normalizing inventory levels in the automotive industry
Threats:
- Increasing competition in the online automotive marketplace
- Macroeconomic factors affecting the used car market
- Potential for market saturation in core segments
- Technological disruptions in the automotive industry
Analysts Targets
- RBC Capital Markets: $42.00 (November 11th, 2024)
- JMP Securities: $41.00 (November 11th, 2024)
- JMP Securities: $32.00 (August 15th, 2024)
- JMP Securities: $32.00 (August 12th, 2024)
- RBC Capital Markets: $30.00 (August 9th, 2024)
- JMP Securities: $30.00 (June 7th, 2024)
CarGurus, Inc. (NASDAQ:CARG) continues to navigate a complex automotive market landscape, leveraging its strong core marketplace business while addressing challenges in its wholesale segment. The company's ability to innovate and adapt to changing market conditions will be crucial in determining its long-term success. Investors and analysts will be closely watching CarGurus' performance in the coming quarters, particularly focusing on the progress of CarOffer and the continued growth of the marketplace business.
This analysis is based on information available up to November 12, 2024, and reflects the most recent analyst reports and market data provided.
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