Over the last six months, CarGurus shares have sunk to $33.24, producing a disappointing 8.3% loss - worse than the S&P 500’s 2.3% drop. This may have investors wondering how to approach the situation.
Following the drawdown, is now a good time to buy CARG? Find out in our full research report, it’s free.
Why Does CarGurus Spark Debate?
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.
Two Positive Attributes:
1. Outstanding Long-Term EPS Growth
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
CarGurus’s EPS grew at 26.2% compounded annual growth rate over the last three years, higher than its 18.2% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.
2. Increasing Free Cash Flow Margin Juices Financials
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.
As you can see below, CarGurus’s margin expanded by 14.9 percentage points over the last few years. This is encouraging because it gives the company more optionality. CarGurus’s free cash flow margin for the trailing 12 months was 29.3%.
One Reason to be Careful:
Change in Paying Dealers Points to Soft Demand
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.
Over the last two years, CarGurus’s paying dealers, a key performance metric for the company, increased by 3.6% annually to 34,409 in the latest quarter. This growth rate lags behind the hottest consumer internet applications. If CarGurus wants to accelerate growth, it likely needs to engage users more effectively with its existing offerings or innovate with new products.
Final Judgment
CarGurus’s merits more than compensate for its flaws. With the recent decline, the stock trades at 9.6× forward EV/EBITDA (or $33.24 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free.
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