CarGurus (CARG)

Online auto marketplace CarGurus (NASDAQ:CARG) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 4.3% year on year to $225.2 million. The company expects next quarter’s revenue to be around $232 million, close to analysts’ estimates. Its non-GAAP profit of $0.46 per share was 5.5% above analysts’ consensus estimates.

Company Overview

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.

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).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. CarGurus’s demand was weak over the last three years as its sales fell at a 9.3% annual rate. This wasn’t a great result and is a rough starting point for our analysis.

This quarter, CarGurus grew its revenue by 4.3% year on year, and its $225.2 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 6.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 6.2% over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.

User 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.

CarGurus struggled with new customer acquisition over the last two years as its paying dealers were flat at 32,372. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If CarGurus wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.

Luckily, CarGurus added 1,197 paying dealers in Q1, leading to 3.8% year-on-year growth. The quarterly print was higher than its two-year result, suggesting its new initiatives are accelerating user growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and CarGurus’s take rate, or "cut", on each order.

CarGurus’s ARPU growth has been exceptional over the last two years, averaging 11%. Although its paying dealers were flat during this time, the company’s ability to successfully increase monetization demonstrates its platform’s value for existing users.

This quarter, CarGurus’s ARPU clocked in at $6,173. It grew by 9% year on year, faster than its paying dealers.

For online marketplaces like CarGurus, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification.

CarGurus’s gross margin is one of the highest in the consumer internet sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in product and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 80.2% gross margin over the last two years. That means CarGurus only paid its providers $19.81 for every $100 in revenue.

In Q1, CarGurus produced a 88.7% gross profit margin, up 7.6 percentage points year on year. CarGurus’s full-year margin has also been trending up over the past 12 months, increasing by 10.8 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Consumer internet businesses like CarGurus grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

CarGurus does a decent job acquiring new users, spending 42.3% of its gross profit on sales and marketing expenses over the last year. This decent efficiency indicates relatively solid competitive positioning, giving CarGurus the freedom to invest its resources into new growth initiatives.

Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.

CarGurus has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 26%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, CarGurus’s EBITDA margin rose by 7.9 percentage points over the last few years, showing its efficiency has improved.

This quarter, CarGurus generated an EBITDA profit margin of 29.4%, up 6.1 percentage points year on year. The increase was driven by stronger leverage on its cost of sales (not higher efficiency with its operating expenses), as indicated by its larger rise in gross margin.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

CarGurus’s EPS grew at an unimpressive 7.5% compounded annual growth rate over the last three years. On the bright side, this performance was better than its 9.3% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

Diving into the nuances of CarGurus’s earnings can give us a better understanding of its performance. As we mentioned earlier, CarGurus’s EBITDA margin expanded by 7.9 percentage points over the last three years. On top of that, its share count shrank by 11%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, CarGurus reported EPS at $0.46, up from $0.32 in the same quarter last year. This print beat analysts’ estimates by 5.5%. Over the next 12 months, Wall Street expects CarGurus’s full-year EPS of $1.87 to grow 4.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

CarGurus has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 13.6% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that CarGurus’s margin expanded by 11.7 percentage points over the last few years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

CarGurus’s free cash flow clocked in at $60.25 million in Q1, equivalent to a 26.8% margin. This result was good as its margin was 18.5 percentage points higher than in the same quarter last year, building on its favorable historical trend.

CarGurus reported $172.9 million of cash and $195.4 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $263.1 million of EBITDA over the last 12 months, we view CarGurus’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $11.38 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by CarGurus’s optimistic EPS and EBITDA guidance for next quarter, which blew past analysts’ expectations. We were also glad this quarter's EPS and EBITDA outperformed Wall Street’s estimates. Overall, this print was solid. The stock traded up 5% to $29.35 immediately after reporting.

Updated: May 15, 2025 at 10:26 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own CarGurus, you should also grasp the company’s longer-term business quality and valuation.

CarGurus isn’t a bad business, but we’re not clamoring to buy it here and now. Although its revenue has declined over the last three years, its growth over the next 12 months is expected to be higher. And while CarGurus’s users were flat, its impressive EBITDA margins show it has a highly efficient business model.

CarGurus’s EV/EBITDA ratio based on the next 12 months is 12.2x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $38.92 on the company (compared to the current share price of $32.12).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.