CarGurus

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

CarGurus, Inc. is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplaces with both digital retail solutions and the CarOffer, LLC (CarOffer) online wholesale platform. The CarGurus platform gives consumers the confidence to shop and sell cars online or in person, and it gives dealerships the ability to accurately price, effectively market, instantly value, and quickly sell vehicles, all in a streamlined user experience.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

CarGurus operates primarily in the United States, Canada, and the United Kingdom, with two reportable segments: U.S. Marketplace and Digital Wholesale. The U.S. Marketplace connects consumers and dealers, providing a platform for consumers to browse listings, access reviews, and research vehicle prices, while also enabling dealers to advertise their inventory and generate leads. The Digital Wholesale segment, built on the CarOffer platform, allows dealers to transact with each other on a business-to-business (B2B) basis, facilitating more efficient inventory management.

  • Revenues: CarGurus generates revenue through various channels, which can be broadly categorized into:

    • Marketplace Revenue: Primarily derived from subscription-based listings packages that dealers purchase to feature their inventory on CarGurus’ platform and related advertising products. The pricing of these packages is variable and includes a combination of monthly, quarterly, semiannual and annual subscription options.

    • Wholesale Revenue: Includes fees from facilitating the buying and selling of vehicles through the CarOffer platform.
    • Product Revenue: Includes sales of vehicles acquired through IMCO transactions, and also from various advertising products.

CarGurus’ marketplace revenue is primarily derived in the U.S., while its other revenues are from product and wholesale segments and are geographically focused across all its operating locations.

  • Industry Trends:
    • The automotive industry is increasingly moving online, with consumers relying more heavily on digital platforms for research and transactions.
    • The rise of eCommerce has impacted the used car market, with an increasing number of dealers looking for better digital solutions to source and manage inventory.
  • Competitive Landscape: CarGurus faces intense competition from established players such as CarMax, AutoNation, and other major online listing services such as Cars.com, AutoTrader, and Edmunds. In the digital wholesale marketplace, CarGurus competes with companies that provide software and technology for the wholesale market, like ACV Auctions. The competitive intensity also includes the big names entering the markets, like eBay and Amazon.
  • CarGurus’ unique value proposition lies in its dual platform model, combining consumer-facing listings with the B2B marketplace of CarOffer. This creates a more comprehensive ecosystem for buying and selling vehicles, from consumers to dealers and vice versa, rather than just directly to the consumer or just facilitating dealer-to-dealer transactions.
  • Differentiation:
    • CarGurus differentiates itself through its focus on transparency and data-driven insights. The platform uses its Instant Market Value tool to give consumers the ability to accurately value vehicles, and its pricing tools help dealers list more attractively priced vehicles.
    • The CarOffer platform within the company’s structure gives it a differentiated ability to facilitate both consumer and dealer sides of the market in a more holistic way.
  • Recent Concerns and Controversies:
    • CarGurus has continued to see a decline in its digital wholesale segment. Management has noted that this is primarily due to lower market volume and price, as well as a decline in transaction volume, which impacts profitability. The company’s management expects these trends to continue through the next few quarters.
    • In addition, CarGurus has reported revenue decreases in product revenue, which includes the sales of vehicles acquired through IMCO transactions. The company’s management indicated they had lower margins in this segment, due to a change in the nature of their inventories and that the used car market has recently seen reduced pricing for used cars, and also, these are not seen as revenue-driving businesses for the long run. Management stated that they are focused on improving efficiency and pricing to minimize any additional impacts and to create a better pricing for the coming quarters.

Moat: 2 / 5

CarGurus’ moat is quite weak at best, primarily due to the current state of its industry and the overall competitive landscape. It does not have unique enough offerings to withstand its competitors’ aggressive moves. CarGurus does possess some attributes that might lead to a narrow moat in the future, but currently it is not a wide moat.

  • Network Effects: The company’s primary moat stems from network effects with the main value driver being the listings the marketplace facilitates: more buyers attract more sellers and vice versa. This applies more to their marketplace business than the digital wholesale segment. But this moat isn’t very strong because there are a lot of other players already in that space that are providing the same functionality and more. There are a lot of other places to buy and sell cars and therefore the switching costs are very low for a user. It has a limited scope.
  • Intangible Assets (Brand): Although CarGurus has a known brand, this has limited pricing power because of easy substitution and alternatives. The pricing is not seen as a premium compared to its peers, it has some name recognition but the name itself is not a major competitive advantage.
  • Scale: The scale economies for the marketplace are limited because expansion doesn’t always lead to cost advantages due to increasing competition, and advertising costs rise with increased competition, so the company is not guaranteed a competitive advantage over its peers. The company is not a behemoth such as Amazon to squeeze and leverage its scale to attain the economic edge against smaller competitors. Also, the size of the dealer market is limited by the fact that auto dealers are limited by their geography. The wholesale segment could have some scale advantages, but management has noted that it is not their intention to use it as a major avenue for sustainable profitability.

Risks:

Here are some legitimate risks that could harm CarGurus’ moat and business resilience:

  • Intensified Competition: Increased competition from both established players and new entrants could erode CarGurus’ market share and limit its ability to sustain a profitable business model. The industry’s consolidation of auto marketplaces and the emergence of new disruptive technology would create pricing pressures and lower margins.
  • Changing Consumer Behavior: Shifts in consumer preferences toward online car sales and the need for in-person interaction could impact CarGurus’ growth prospects. If more and more people prefer to buy cars directly from the manufacturer or prefer a more direct and physical approach, the need for a marketplace might be greatly reduced.
  • Technological Disruptions: Technological advancements, such as AI-driven marketing and self-driving car sales platforms, could disrupt the company’s business model and erode its competitive advantages.
  • Macroeconomic Factors: Economic downturns, such as the current one, can directly impact the automotive industry, reducing demand and transaction volume. Reduced auto sales will affect dealer budgets, thus negatively impacting CarGurus’ revenue.
  • Integration Risk for Acquisitions: CarGurus’ success depends on integrating acquisitions effectively, and potential issues during integration may lead to lower efficiencies and cost overruns. The acquisition of CarOffer, in particular, needs to be watched as to how it integrates with their existing operations and improves the financial performance of the company.

Resilience:

CarGurus has displayed an admirable ability to bounce back from setbacks in the past few years, and its high growth rate in the marketplace division, as well as its international growth show the potential of this company. But the future of the car marketplace is still yet to be decided and may see new entrants dominating the market, or people and dealerships losing interest in online marketplaces. The overall industry is still in flux and therefore is risky, but the company’s management is taking the right steps to ensure its survival and growth for the coming few years.

Financial Analysis:

  • Profitability: CarGurus has fluctuated through profitability in its recent past, but the marketplace segment of the company has seen a steady recovery in operating margins, with some recent improvements in sales and revenue growth too. The Digital Wholesale segment has not been performing very well, and the company is still trying to make it a long-term profitable business. However, it’s not the main focus as of now. In 2023 the gross profit margin was 71.4%.
  • Revenue Trends: There has been some revenue increase in both segments, but the company’s focus seems to be on growing the core marketplace business, with most revenue growth generated from that side of the business in the past few quarters, as well as an attempt to control costs. For the full year of 2023 revenues were 914.2 million. The company’s guidance for 2024 forecasts revenues between 885-915 million, which is lower than 2023’s total revenues.
  • Cost Structure: The company has increased sales and marketing costs, but it has reduced the cost of revenue. Operating margins have been rising over the past few years, which shows an effort by the company to rein in its spending and become more profitable. This will help in improving future profitability.

  • It is worth noting that in the financial statements the management have not made use of non-GAAP EBITDA, due to its non-comparable nature with other companies. Instead they are using adjusted EBITDA, which has removed the effects of share based compensation, and other charges that are not part of operating income, to reflect the true picture of their operations.

  • Capital Structure: CarGurus’ balance sheet is healthy with a current ratio greater than 2, indicating it is in a healthy state financially and has enough liquidity to meet its current liabilities. The level of long-term debt is low and hence does not make up a lot of the liabilities, and the level of short-term debts is kept quite low.

Understandability: 2/5

The business model is complicated due to the number of moving parts in it, such as the marketplace business, wholesale trading platform, and other side offerings.

  • Complexity: The auto industry itself is also very complicated to understand, it includes everything from the manufacturer down to the dealers and buyers, so this makes it hard to analyze how all these layers affect the business.
  • Multiple Revenue Streams: The different revenue streams also make it harder to analyze the company because one segment is growing and becoming profitable, but the other segment is seeing a decline. So, the company’s value becomes more complicated.
  • Unique Financials: The financial statements are very detailed and include the nuances of the automotive sales process, while also including aspects of a tech company, this makes it very complex and makes it challenging for anyone to easily understand the results.
  • While, it is not very easy to give a comprehensive summary of the operations, it is not a hard business model to understand if one dedicates some time into understanding its workings. But the current state of operations are not easy to understand, therefore a rating of 2.

Balance Sheet Health: 4/5

CarGurus’ balance sheet is in good health, especially after a couple of years of operating improvements.

  • Cash & Liquidity: The company has a good level of cash and cash equivalents, showing financial stability and short-term flexibility.
  • Low Debt: The debt on the balance sheet is very low in proportion to its assets, showing the company is not highly leveraged.
  • Good Ratios: Both current and quick ratios are within the industry average. These metrics imply that the company will be able to pay off their short term liabilities with ease.
  • Positive ROE: Although a little volatile, the ROE over the past three to five years suggests good long-term financial health.
  • Stable Liquidity: The company has a good amount of liquidity to make sure its business runs smoothly. The company is not cash starved and does not depend on its short-term credit facilities.