Online new and used car marketplace Cars.com (NYSE:CARS) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 6.8% year on year to $179.6 million. The company expects next quarter's revenue to be around $180 million, in line with analysts' estimates. It made a GAAP profit of $0.12 per share, down from its profit of $0.54 per share in the same quarter last year.
Cars.com (CARS) Q4 FY2023 Highlights:
- Revenue: $179.6 million vs analyst estimates of $178.4 million (small beat)
- EPS: $0.12 vs analyst expectations of $0.16 (24.4% miss)
- Revenue Guidance for Q1 2024 is $180 million at the midpoint, roughly in line with what analysts were expecting
- Free Cash Flow of $39.83 million, up 31.1% from the previous quarter
- Gross Margin (GAAP): 82.8%, up from 69.1% in the same quarter last year
- Dealer Customers: 19,504, down 2 year on year
- Market Capitalization: $1.20 billion
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.
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), CarGurus (NASDAQ:CARG), and Vroom (NASDAQ:VRM).Sales Growth
Cars.com's revenue growth over the last three years has been unremarkable, averaging 9.1% annually. This quarter, Cars.com reported mediocre 6.8% year-on-year revenue growth, in line with what analysts were expecting.
Guidance for the next quarter indicates Cars.com is expecting revenue to grow 7.7% year on year to $180 million, improving on the 5.6% year-on-year increase it recorded in the same quarter last year.
Usage Growth
As an online marketplace, Cars.com generates revenue growth by increasing both the number of buyers on its platform and the average order size in dollars.
Over the last two years, Cars.com's active buyers, a key performance metric for the company, grew 0.2% annually to 19,504. This is one of the lowest rates of growth in the consumer internet sector.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Cars.com because it measures how much the company earns in transaction fees from each buyer. Furthermore, ARPB gives us unique insights as it's a function of a user's average order size and Cars.com's take rate, or "cut", on each order.
Cars.com's ARPB growth has been mediocre over the last two years, averaging 4.9%. However, the company's ability to continue increasing prices while growing its active buyers shows that buyers still find value in its platform. This quarter, ARPB grew 6.8% year on year to $9,209 per buyer.
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.
Cars.com'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 82.8% this quarter, up 13.7 percentage points year on year.
For online marketplaces like Cars.com, 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, Cars.com had $0.83 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. 
Over the past year, Cars.com has seen its already strong gross margins rise, averaging 71.5%. These robust unit economics, driven by the company's lucrative business model and strong pricing power, are higher than its peers and allow Cars.com 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 Cars.com grow from a combination of product virality, paid advertisement, and incentives.
It's relatively expensive for Cars.com to acquire new users as the company has spent 48.4% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates that Cars.com 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.
Cars.com reported EBITDA of $55.4 million this quarter, resulting in a 30.8% margin. Additionally, Cars.com has demonstrated extremely high profitability over the last four quarters, with average EBITDA margins of 28.3%.
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. Cars.com's free cash flow came in at $39.83 million in Q4, up 24.8% year on year.
Cars.com has generated $115.8 million in free cash flow over the last 12 months, an impressive 16.8% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Cars.com's Q4 Results
It was unfortunate to see Cars.com's revenue growth slow and miss analysts' estimates. Its revenue guidance for next quarter also fell short, but it expects to generate higher adjusted EBITDA margins than expected (28% vs estimates of 27%). During the quarter, the company acquired D2C Media for $76 million to expand its platform into Canada.
Looking at the broader automotive market, the company is optimistic for 2024. It stated it "believes market conditions are improving, with increased OEM production, new model launches, and rising dealer inventory... OEM and National Advertising spend is also expected to be up year-over-year". Despite this optimism, the results could have been better. The stock is flat after reporting and currently trades at $18.05 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.
Although we have other favorites, we understand the arguments that Cars.com isn't a bad business. Although its revenue growth has been a little slower over the last three years, its growth over the next 12 months is expected to be higher. And while its growth in active buyers has been lackluster, its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cash cushion.
At the moment Cars.com trades at 5.8x next 12 months EV-to-EBITDA. In the end, beauty is in the eye of the beholder. While Cars.com wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
Wall Street analysts covering the company had a one-year price target of $23.36 per share right before these results (compared to the current share price of $18.05).
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