Cars.com (CARS)

Online new and used car marketplace Cars.com (NYSE:CARS) missed Wall Street’s revenue expectations in Q1 CY2025, with sales flat year on year at $179 million. Its GAAP loss of $0.03 per share was significantly below analysts’ consensus estimates.

Company Overview

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.

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).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Cars.com’s 4.5% annualized revenue growth over the last three years was sluggish. This was below our standard for the consumer internet sector and is a poor baseline for our analysis.

This quarter, Cars.com missed Wall Street’s estimates and reported a rather uninspiring 0.6% year-on-year revenue decline, generating $179 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 4.2% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and suggests its newer products and services will not catalyze better top-line performance yet.

Buyer Growth

As an online marketplace, Cars.com generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Cars.com struggled with new customer acquisition over the last two years as its dealer customers were flat at 19,250. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Cars.com wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.

Unfortunately, Cars.com’s dealer customers were once again flat year on year in Q1. The quarterly print isn’t too different from its two-year result, suggesting its new initiatives aren’t accelerating buyer growth just yet.

Revenue Per Buyer

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

Cars.com’s ARPB growth has been subpar over the last two years, averaging 2.8%. This raises questions about its platform’s health when paired with its flat dealer customers. If Cars.com wants to grow its buyers, it must either develop new features or lower its monetization of existing ones.

This quarter, Cars.com’s ARPB clocked in at $2,473. It declined 1.3% year on year, mirroring the performance of its dealer customers.

For online marketplaces like Cars.com, 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.

Cars.com has robust unit economics, an output of its asset-lite business model and pricing power. Its margin is better than the broader consumer internet industry and enables the company to fund large investments in new products and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 67.2% gross margin over the last two years. Said differently, roughly $67.22 was left to spend on selling, marketing, and R&D for every $100 in revenue.

This quarter, Cars.com’s gross profit margin was 66.8%, in line with the same quarter last year. Zooming out, Cars.com’s full-year margin has been trending down over the past 12 months, decreasing by 1.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

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 48.6% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that Cars.com operates in a competitive market and must continue investing to maintain an acceptable growth trajectory.

Cars.com 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 28.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Cars.com’s EBITDA margin might fluctuated slightly but has generally stayed the same over the last few years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Cars.com generated an EBITDA profit margin of 28.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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.

Cars.com’s EPS grew at an astounding 73.6% compounded annual growth rate over the last three years, higher than its 4.5% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its EBITDA margin didn’t expand.

We can take a deeper look into Cars.com’s earnings to better understand the drivers of its performance. A three-year view shows that Cars.com has repurchased its stock, shrinking its share count by 8.1%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, Cars.com reported EPS at negative $0.03, down from $0.01 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Cars.com’s full-year EPS of $0.68 to grow 32.3%.

If you’ve followed StockStory for a while, you know 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 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 17.2% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that Cars.com’s margin expanded by 1.2 percentage points over the last few years. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Cars.com’s free cash flow clocked in at $23.66 million in Q1, equivalent to a 13.2% margin. The company’s cash profitability regressed as it was 2 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Cars.com reported $31.44 million of cash and $455.6 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 $207.8 million of EBITDA over the last 12 months, we view Cars.com’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $16.21 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 enjoyed seeing Cars.com beat analysts’ EBITDA expectations this quarter. On the other hand, its revenue, EPS, and dealer customers missed. Zooming out, we think this was a mixed quarter. The stock traded up 1.5% to $11.49 immediately following the results.

Updated: May 10, 2025 at 10:29 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Cars.com.

Cars.com isn’t a terrible business, but it doesn’t pass our bar. For starters, its revenue growth was weak over the last three years , and analysts expect its demand to deteriorate over the next 12 months. And while its impressive EBITDA margins show it has a highly efficient business model, the downside is its active buyers were flat. On top of that, its declining EPS over the last three years makes it a less attractive asset to the public markets.

Cars.com’s EV/EBITDA ratio based on the next 12 months is 3.1x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $16.71 on the company (compared to the current share price of $10.43).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

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.

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