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CarGurus (NASDAQ:CARG) Beats Q4 Sales Targets But Stock Drops 15%


Full Report / February 26, 2024

Online auto marketplace CarGurus (NASDAQ:CARG) reported results ahead of analysts' expectations in Q4 FY2023, with revenue down 22.2% year on year to $223.1 million. On the other hand, next quarter's revenue guidance of $211 million was less impressive, coming in 11.5% below analysts' estimates. It made a GAAP loss of $0.21 per share, down from its profit of $0.21 per share in the same quarter last year.

CarGurus (CARG) Q4 FY2023 Highlights:

  • Revenue: $223.1 million vs analyst estimates of $219.8 million (1.5% beat)
  • EPS: -$0.21 vs analyst estimates of $0.18 (-$0.39 miss)
  • Revenue Guidance for Q1 2024 is $211 million at the midpoint, below analyst estimates of $238.4 million
  • Free Cash Flow was -$17.89 million, down from $17.22 million in the previous quarter
  • Gross Margin (GAAP): 75.3%, up from 47.8% in the same quarter last year
  • Total paying dealers: 30,935, down 372 year on year
  • Market Capitalization: $2.68 billion

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

Online Marketplace

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 that feed back into further customer acquisition.

Competitors in the online auto market include Carvana (NYSE:CVNA), Cars.com (NYSE:CARS), and Vroom (NASDAQ:VRM).

Sales Growth

CarGurus's revenue growth over the last three years has been impressive, averaging 42.1% annually. This quarter, CarGurus beat analysts' estimates but reported a year on year revenue decline of 22.2%.

CarGurus Total Revenue

CarGurus is expecting next quarter's revenue to decline 9% year on year to $211 million, improvement on the 46.1% year-on-year decrease it recorded in the same quarter last year.

Usage Growth

As an online marketplace, CarGurus generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Over the last two years, CarGurus's dealers, a key performance metric for the company, grew 0.5% annually to 30,935. This is one of the lowest rates of growth in the consumer internet sector.

CarGurus Total paying dealers

Unfortunately, CarGurus's dealers decreased by 372 in Q4, a 1.2% drop since last year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like CarGurus because it measures how much the company earns in transaction fees from each user. Furthermore, ARPU gives us unique insights as it's a function of a user's average order size and CarGurus's take rate, or "cut", on each order.

CarGurus ARPU

CarGurus's ARPU growth has been exceptional over the last two years, averaging 23.4%. The company's ability to increase prices while growing its users demonstrates its platform's value, as its users are spending significantly more than last year. This quarter, ARPU declined 21.3% year on year to $7,213 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor.

CarGurus's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 75.3% this quarter, up 27.5 percentage points year on year.

For online marketplaces like CarGurus, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, CarGurus had $0.75 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. CarGurus Gross Margin (GAAP)

Over the past year, CarGurus has seen its already strong gross margins rise, averaging 71.3%. These robust unit economics, driven by the company's lucrative business model and strong pricing power, are higher than its peers and allow CarGurus to make more investments in product and marketing.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like CarGurus grow from a combination of product virality, paid advertisement, and incentives.

It's relatively expensive for CarGurus to acquire new users as the company has spent 46.7% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates that CarGurus has to compete for its users and continue investing to maintain its growth trajectory.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

CarGurus reported EBITDA of $61.46 million this quarter, resulting in a 27.5% margin. Furthermore, CarGurus has shown strong profitability over the last four quarters, with average EBITDA margins of 21.4%.

CarGurus Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. CarGurus burned through $17.89 million in Q4, with cash flow turning negative year on year.

CarGurus Free Cash Flow

CarGurus has generated $83.32 million in free cash flow over the last 12 months, a solid 9.1% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from CarGurus's Q4 Results

It was good to see CarGurus narrowly top analysts' revenue expectations this quarter. On the other hand, its revenue is still in decline and revenue guidance for next quarter missed Wall Street's estimates. Overall, the results could have been better. The company is down 15% on the results and currently trades at $20.3 per share.

Is Now The Time?

CarGurus may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think CarGurus is a good business. We'd expect growth rates to moderate from here, but its revenue growth has been exceptional over the last three years. And while its growth in users has been lackluster, the good news is its top-tier ARPU growth shows the increasing value of its platform to its users. On top of that, its gross margins are a strong starting point for the overall profitability of the business.

At the moment CarGurus trades at 13.1x next 12 months EV-to-EBITDA. There's definitely a lot of things to like about CarGurus and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.

Wall Street analysts covering the company had a one-year price target of $25.08 per share right before these results (compared to the current share price of $20.30), implying they saw upside in buying CarGurus in the short term.

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