What Happened:
Shares of online auto marketplace CarGurus (NASDAQ:CARG) jumped 5.95% in the pre-market session after data from the Bureau of Labour Statistics revealed that the US consumer price index (CPI) came in at 3.0% in June on an annual basis, compared to the previous month's 4% level and below analysts' median forecast of 3.1%. Similarly, core CPI (prices excluding gas and food, which are more volatile) rose by 4.8% yearly, versus the previous reading of 5.3%, and below analysts' median forecast of 5%. The data showed further progress on inflation and could ease the pressure on the Fed to hike rates at its next meeting. As a reminder, higher rates have a negative impact on equity valuations, as today's stock price is the present value of future cash flows discounted at a discount rate. The higher the prevailing interest rate environment, the higher that discount rate. In addition, higher rates particularly hurt higher-growth stocks such as tech names since investors must discount financials further out in the future back to the present. After the initial pop the shares cooled down to $23.06, up 1.03% from previous close.
What is the market telling us:
CarGurus's shares are somewhat volatile and over the last year have had 19 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move was 2 months ago, when the stock gained 9.04% on the news that the company reported first quarter results that exceeded analysts' estimates for revenue, adjusted EBITDA, free cash flow, and earnings per share (EPS). Additionally, revenue, adjusted EBITDA and EPS guidance for the next quarter were above Consensus. The company's guidance is highly reassuring in light of a choppy auto market dealing with normalization of demand post-COVID and potential lending headwinds challenges due to the recent and potentially growing banking crisis.
CarGurus is up 60.4% since the beginning of the year, but at $23.06 per share it is still trading 10.4% below its 52-week high of $25.72 from August 2022. Investors who bought $1,000 worth of CarGurus's shares 5 years ago would now be looking at an investment worth $619.62.
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