Online auto marketplace CarGurus (NASDAQ:CARG) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 7% year on year to $215.8 million. On the other hand, next quarter's revenue guidance of $212 million was less impressive, coming in 5.6% below analysts' estimates. It made a GAAP profit of $0.20 per share, improving from its profit of $0.10 per share in the same quarter last year.
CarGurus (CARG) Q1 CY2024 Highlights:
- Revenue: $215.8 million vs analyst estimates of $216.8 million (small miss)
- EPS: $0.20 vs analyst estimates of $0.14 (45.1% beat)
- Revenue Guidance for Q2 CY2024 is $212 million at the midpoint, below analyst estimates of $224.5 million
- Gross Margin (GAAP): 81.1%, up from 66.8% in the same quarter last year
- Free Cash Flow of $17.83 million is up from -$17.89 million in the previous quarter
- Paying Dealers: 31,175, down 116 year on year
- Market Capitalization: $2.38 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 40.8% annually. This quarter, CarGurus reported a year on year revenue decline of 7%, missing analysts' expectations.
CarGurus is expecting next quarter's revenue to decline 11.6% year on year to $212 million, improving on the 53.1% year-on-year decrease it recorded in the comparable quarter last year. Ahead of the earnings results, analysts were projecting sales to grow 3.9% over the next 12 months.
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 users, a key performance metric for the company, grew 0.6% annually to 31,175. This is one of the lowest rates of growth in the consumer internet sector.
Unfortunately, CarGurus's users decreased by 116 in Q1, a 0.4% 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's ARPU growth has been decent over the last two years, averaging 6.9%. The company's ability to increase prices while growing its users demonstrates the value of its platform. This quarter, ARPU grew 13.9% year on year to $5,664 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 81.1% this quarter, up 14.3 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 $0.81 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
CarGurus's gross margins have been trending up over the last 12 months, averaging 74.8%. Its margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.
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 46.3% 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.
This quarter, CarGurus's EBITDA came in at $50.4 million, resulting in a 23.4% margin. Furthermore, CarGurus has shown strong profitability over the last four quarters, with average EBITDA margins of 22.8%.
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's free cash flow came in at $17.83 million in Q1, down 70.5% year on year.
CarGurus has generated $40.69 million in free cash flow over the last 12 months, or 4.5% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.
Key Takeaways from CarGurus's Q1 Results
We struggled to find many strong positives in these results. Its revenue growth regrettably slowed and its revenue guidance for next quarter missed Wall Street's estimates. Overall, this was a bad quarter for CarGurus. The company is down 2.3% on the results and currently trades at $21.75 per share.
Is Now The Time?
CarGurus may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We think CarGurus is a solid business. We'd expect growth rates to moderate from here, but its revenue growth has been impressive over the last three years. And while its users have declined, the good news is its impressive gross margins are a wonderful starting point for the overall profitability of the business. On top of that, its solid free cash flow generation gives it re-investment options.
At the moment, CarGurus trades at 11.3x next 12 months EV-to-EBITDA. There are definitely 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.
Wall Street analysts covering the company had a one-year price target of $25.18 per share right before these results (compared to the current share price of $21.75), implying they saw upside in buying CarGurus in the short term.
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