Online auto marketplace CarGurus (NASDAQ:CARG) announced better-than-expected results in the Q1 FY2023 quarter, with revenue down 46.1% year on year to $232 million. The company expects that next quarter's revenue would be around $230 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. CarGurus made a GAAP profit of $16.1 million, down on its profit of $18.8 million, in the same quarter last year.
CarGurus (CARG) Q1 FY2023 Highlights:
- Revenue: $232 million vs analyst estimates of $214.4 million (8.22% beat)
- EPS: $0.10 vs analyst estimates of $0.05 ($0.05 beat)
- Revenue guidance for Q2 2023 is $230 million at the midpoint, above analyst estimates of $228.3 million
- Free cash flow of $60.5 million, down 33.2% from previous quarter
- Gross Margin (GAAP): 66.8%, up from 42.2% same quarter last year
- Total paying dealers: 31.3 thousand, up 424 year on year
Bringing transparency to a sometimes opaque process, CarGurus (NASDAQ:CARG) is a digital marketplace where auto dealers can connect with potential customers and where car buyers can browse, purchase, and obtain financing.
CarGurus was founded in 2006 by Langley Steinert, a co-founder of TripAdvisor, who saw an opportunity to create a better experience for car buyers–who often feel uninformed–and sellers–who sometimes struggle to reach potential buyers. CarGurus provides an end-to-end platform where car buyers and sellers can conduct business in a transparent and digital way all the way from sourcing for dealers to consumer browsing to buying/selling to financing.
The company's customers include individual car buyers and sellers (retail), as well as dealerships and other automotive businesses (wholesale). CarGurus generates revenue through advertising and subscription services for dealerships. These dealer services such as inventory management and lead generation help dealers gain more visibility into their business and connect with potential buyers
The majority of car dealerships in the United States list their inventory on the CarGurus platform, which means extensive inventory and selection. Additionally, features such as the CarGurus Instant Market Value tool, which calculates the fair market value of a car based on various factors, make it easier for buyers to make informed purchasing decisions
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.Competitors in the online auto market include Carvana (NYSE:CVNA), Cars.com (NYSE:CARS), and Vroom (NASDAQ:VRM).
CarGurus's revenue growth over the last three years has been impressive, averaging 49% annually. This quarter, CarGurus beat analyst estimates but reported a rather lacklustre 46.1% year on year revenue decline.
CarGurus is guiding for revenue to decline next quarter 55% year on year to $230 million, reverse on the 135% year-over-year increase in revenue the company had recorded in the same quarter last year. Before the earnings results were announced, Wall St analysts covering the company were estimating revenues to decline -25.6% over the next twelve months.
As a online marketplace, CarGurus generates revenue growth both by growing the number of users on the platform and the average user size in dollars.
Over the last two years the number of CarGurus's paying users, a key usage metric for the company, grew 1.13% annually to 31.3 thousand. This is one of the lowest levels of growth in the consumer internet sector.
In Q1 the company added 424 paying users, translating to a 1.37% growth year on year.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for CarGurus it is a function of the size of the average user on the platform and what is CarGurus's take rate (cut) from each.
CarGurus’s ARPU growth has been excellent over the last two years, averaging 76%. The ability to increase price while still growing its paying users shows the value of CarGurus’s platform, as its users are spending significantly more than last year. This quarter, ARPU shrank 46.9% year on year, settling in at $7.41 thousand for each of the paying users.
User Acquisition Efficiency
Consumer internet businesses like CarGurus grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.
It is relatively expensive for CarGurus to acquire new users, with the company spending 51.5% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates CarGurus has to compete for users and points to CarGurus likely having to continue to invest to maintain growth.
Earnings & Free Cash Flow
Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.
CarGurus reported EBITDA of $40.8 million this quarter, which was a 17.6% margin. Over the last twelve months, the company has exhibited strong profitability with average EBITDA margins of 11.7%.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. CarGurus's free cash flow came in at $60.5 million in Q1, down 32.3% year on year.
CarGurus has generated $210 million in free cash flow over the last twelve months, an impressive 14.4% of revenues. This extremely high FCF margin is a result of CarGurus asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from CarGurus's Q1 Results
With a market capitalization of $1.86 billion CarGurus is among smaller companies, but its more than $456.7 million in cash and positive free cash flow over the last twelve months give us confidence that CarGurus has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly CarGurus outperformed analysts’ revenue and EPS expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see that the revenue growth was quite weak. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 5.68% on the results and currently trades at $17.3 per share.
Is Now The Time?
When considering CarGurus, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that CarGurus is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last three years. And while its user growth has been lackluster, the good news is its top-tier ARPU growth shows increasing value of its platform to its users.
At the moment CarGurus trades at next twelve months EV/EBITDA 13.9x. In the end, beauty is in the eye of the beholder. While CarGurus wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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