Online new and used car marketplace Cars.com (NYSE:CARS) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 5.6% year on year to $167.1 million. The company expects that next quarter's revenue would be around $169 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Cars.com made a GAAP profit of $11.5 million, improving on its profit of $4.34 million, in the same quarter last year.
Cars.com (CARS) Q1 FY2023 Highlights:
- Revenue: $167.1 million vs analyst estimates of $166.9 million (small beat)
- EPS: $0.17 vs analyst estimates of $0.06 ($0.11 beat)
- Revenue guidance for Q2 2023 is $169 million at the midpoint, roughly in line with what analysts were expecting
- Gross Margin (GAAP): 82.2%, up from 69% same quarter last year
- Dealer Customers: 19.2 thousand, down 314 year on year
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE:CARS) is a digital marketplace that connects new and used car buyers and sellers.
The company's primary product is its website, which allows users to search for new and used cars, research vehicles, and connect with dealerships. Cars.com provides a centralized platform that helps customers make more informed decisions amd simplifies the car buying process.
First, customers can search for cars based on preferences, such as model, price range, and location. This eliminates the need to visit multiple dealerships. Second, the platform provides information about each car, including photos and specifications. This allows consumers to make more informed decisions. Third, the platform provides tools that allow buyers to connect with local dealerships to ask follow-up questions and schedule test drives. This allows buyers to find the right dealership and car. Finally, the platform offers resources such as financing and insurance options. This closes the loop on an actual transaction.
While the platform aims to optimize the buyer experience, Cars.com generates revenue primarily from car dealers who pay for marketplace subscription advertising products. Specifically, dealers pay to have their inventory listed and featured on the Cars.com platform. Other revenue generators include dealer website hosting and reputation management products.
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), CarGurus (NASDAQ:CARG), and Vroom (NASDAQ:VRM).
Cars.com's revenue growth over the last three years has been unimpressive, averaging 4.76% annually. This quarter, Cars.com reported an mediocre 5.6% year on year revenue growth, roughly in line with what analysts expected.
Guidance for the next quarter indicates Cars.com is expecting revenue to grow 3.76% year on year to $169 million, slowing down from the 4.72% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 4.29% over the next twelve months.
As a online marketplace, Cars.com generates revenue growth both by growing the number of buyers on the platform and the average spend per transaction of the buyers.
Over the last two years the number of Cars.com's active buyers, a key usage metric for the company, grew 2.12% annually to 19.2 thousand buyers. This is one of the lowest levels of growth in the consumer internet sector.
Unfortunately, in Q1 the number of active buyers decreased by 314, a 1.61% drop year on year.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for every consumer internet product and for Cars.com it is a function of how much its buyers spend on the platform and what is Cars.com's take rate (cut) from each transaction.
Cars.com’s ARPB growth has been decent over the last two years, averaging 2.55%. The ability to increase price while still growing its active buyers shows the value of Cars.com’s platform. This quarter, ARPB grew 7.33% year on year, reaching $8.71 thousand for each of the active buyers.
User Acquisition Efficiency
Consumer internet businesses like Cars.com 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 Cars.com to acquire new users, with the company spending 46.9% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Cars.com has to compete for users and points to Cars.com 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.
Cars.com's EBITDA was $44.3 million this quarter, which translates to a 26.5% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 28.2%.
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. Cars.com's free cash flow came in at $22.8 million in Q1, down 13.6% year on year.
Cars.com has generated $73.3 million in free cash flow over the last twelve months, 11.1% of revenues. This strong FCF margin is a result of Cars.com asset lite business model and provides it plenty of cash to invest in the business.
Key Takeaways from Cars.com's Q1 Results
With a market capitalization of $1.29 billion Cars.com is among smaller companies, but its more than $18.8 million in cash and positive free cash flow over the last twelve months give us confidence that Cars.com has the resources it needs to pursue a high growth business strategy.
We struggled to find many strong positives in these results. On the other hand, it was less good to see that the revenue growth was quite weak and there was a churn in number of users. Overall, this quarter's results were not the best we've seen from Cars.com. The company is down 1.75% on the results and currently trades at $19.04 per share.
Is Now The Time?
Cars.com may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in the case of Cars.com we will be cheering from the sidelines. Its revenue growth has been uninspiring. And while its impressive EBITDA margins show massive profitability of the business, the downside is that its user growth has been lackluster and its ARPU is growing slowly.
At the moment Cars.com trades at next twelve months EV/EBITDA 6.7x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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