CarGurus, Inc.

CARG Details

CarGurus, Inc. (NASDAQ: CARG) is an online automotive marketplace connecting buyers and sellers of new and used cars. The company is using proprietary technology, search algorithms, and high-end data analytics to build this transparent automotive marketplace. The company derives its revenue from two segments - Marketplace Subscription Revenue from the listing of dealer display subscriptions, and Advertising and Other Revenue by displaying promotions of auto manufacturers and other auto-related brand advertisers. Apart from the United States, the company also operates in the online marketplace under the CarGurus brand in Canada and United Kingdom. As of June 02, 2021, the company’s market capitalization stood at USD 3.25 billion.

Increasing Dealer Enrollments for CarOffer: On May 21, 2021, the company stated that CarOffer, its 51% held subsidiary, recorded more than 1,400 new dealer enrollments in March and April 2021 on its automated instant wholesale vehicle trade platform. The CarOffer platform is a simplified and efficient solution for dealers to acquire pre-owned inventory. The platform enables dealers to buy and sell vehicles using real-time instant offers.

CarOffer Network Growth (Source: Earnings Presentation, Q1FY21)

Strengthening Dealerships’ Digital Retail Capabilities: On April 22, 2021, the company announced early access for dealerships to preview CarGurus Convert, its latest digital retail product that will help dealers to provide their customers to conduct most of their car purchasing journey online. Shoppers who use CarGurus Convert can build their personalized, near penny-perfect deal that incorporates trade-in details, and dealership-specific finance and insurance products. By using this information, dealerships using CarGurus Convert can finalize the deals with highly qualified shoppers, who have a higher intent to purchase a vehicle.

Q1FY21 Results: The company reported an 8.67% increase in total revenue to USD 171.37 million in Q1FY21 (ending March 31, 2021) compared to USD 157.69 million in Q1FY20. Marketplace subscription revenue was USD 139.56 million in Q1FY21, representing 81.44% of the total revenue during the quarter. The net income for Q1FY21 was USD 19.56 million, compared to USD 12.70 million in Q1FY20.

Key Risks: The operations of the company were severely impacted by the COVID-19 pandemic. In March 2020, the company had closed all its offices. Since the dealerships were also facing significant financial challenges, CARG had to reduce the subscription fee for paying dealers across geographies for a few months. However, the company is making significant advancements in its digital abilities to offset the risk imposed by the pandemic. Moreover, the company’s main source of revenue consists of subscription fees paid by the dealers, and if a significant number of dealers terminate their subscription with the company, it would adversely affect its business and the results of operations.

Outlook: In its Q1FY21 Report, the company stated that it expects total revenue for Q2FY21 to range between USD 186.0 million and USD 192.0 million, and non-GAAP operating income to be in the range of USD 35.5 million and USD 39.5 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

 (Data Source: REFINITIV, Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

CARG Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: CARG increased by 9.70% and 9.09% in the past 3 months and 6 months, respectively, and is currently trading around the mid-point of the 52-week range of USD 19.24 to USD 36.54. The stock is currently trading close to its 200 DMA levels. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 29.76. Considering the uptick in stock price, technological advancements, and decent fundamental growth, we recommend a “Hold” rating on the stock at the closing price of USD 27.25, down by 1.98% as of June 02, 2021.

* The reference data in this report has been partly sourced from REFINITIV.