CARG - CarGurus: Solid Opportunity On The Selloff

2023-08-11 15:24:23 ET

Summary

• CarGurus, Inc. stock has fallen dramatically in recent weeks, presenting a potential buying opportunity.
• The company operates a platform for automobile dealers and consumers to buy and sell cars.
• Despite a decline in revenues, CarGurus reported solid Q2 earnings and raised guidance for the future.
• There is an opportunity for trading this stock, now beaten down from recent 2023 highs.

In the fall, at all-time lows, we called CarGurus, Inc. ( CARG ) a buy for what we viewed as a potential for outsized gains. Shares doubled from that call, and actually still remain up about 30%. Not too shabby, but we see an opportunity for new money to come in for another potential profitable trade after a massive selloff that is, in our opinion, overdone.

As you can see, the stock has fallen dramatically in the last few weeks. We think the stock is entering a buy zone. Here is a way to play it.

The play

Target entry 1: $18.30-$18.50 (25% of position)

Target entry 2: $17.60-$17.75 (35% of position)

Target entry 3: $16.90-$17.10 (40% of position)

Stop loss: $14

Target exit $21

Options considerations: Option suggestions are reserved for investing group members, however there are call and put structures that work for entry.

Discussion

So, if you have continued to read past the actual play you can consider, we will tell you a bit more about the company. This company has a mission to be the go-to platform where automobile dealers can source, market, and sell autos and at the same time consumers can shop, finance, buy and sell.

Make no mistake, there is a lot of competition in the car space, but CarGurus is one of the most visited car sites in America. Their site has many thousands of listings in their marketplace. The company has invested heavily in its technologies and much of their platform rests on the use A.I. and data analytics. It is a bit of a tech play, if you will. We like the operations, but the market is now punishing it, but the company did report earnings that had some positives. We think you scale into this for a trade. Now, let us discuss earnings .

A beat and raise, this is a Bad Beat

This company took a bad beat, reporting a solid quarter and raising guidance. Any negatives in the report, this is overdone. Total revenue was $239.7 million, and of course, as expected, was down precipitously from a year ago given the operational changes, coming in $9.3 million ahead of consensus .

So what went into this revenue figure? Well, the consumer Marketplace revenue was strong at $171.0 million, an increase of 4%. However there were expected major declines in other segments as wholesale revenue was $32.0 million, a decrease of 58% compared to a year ago. The so-called product revenue was down 86% to $36.8 million.

So obviously there was some mixed performance in operational metrics, however. First, total paying dealers were 31,097 to end Q2, flat from a year ago. We would like to see the company do better here. International paying dealers actually rose to 6,877 from 6,655. That was a plus, while U.S. dealers dropped 1%. But the quarterly average revenue per dealer in the U.S. rose to $6,110 versus $5,771a year ago, and rose in international markets, despite the number of dealers remaining flat. The revenue per international dealer was $1,610 versus $1,533 last year. This is also positive. It was simply the wholesale pressures that weighed, a result of many macro factors and operational pressures. We see that as changing moving forward.

Website traffic was actually up in this environment. U.S. average monthly unique users were 31.9 million, up 8% from last year. International average monthly unique users were 7.4 million, rising 15%. This helped drive consumer market place revenues higher.

But, with lower revenues of 51% from a year ago, even with well-controlled costs, earnings fell hard. Adjusted EBITDA, a non-GAAP metric, was $45.2 million compared to $61.2 million. But this was at the highest end of the guidance range for the company. On the overall bottom line, adjusted income net income was $33.8 million, or $0.29 per share, down from $0.32 last year. A 10% decline in EPS given 50% declines in revenues is impressive, frankly. Earnings beat by $0.06.

Looking ahead

As we look to Q3, guidance is mixed, with lower than consensus revenues forecast, but higher than expected EPS forecast. The company expects revenue of $201 million to $221 million, below the $238 million consensus. That is bearish. However, adjusted EPS looks to be in the range of $0.24 to $0.27, whereas the consensus was $0.23. Putting this altogether, if annual EPS comes in at even just above $1.00, we are just 18X FWD EPS, which is attractive, especially as we see performance bottoming out this year into next. We rate CarGurus, Inc. shares a buy on the way down.

Your voice matters

Do you trade this stock? Are you an investor? Do you agree that we are seeing a bottoming out in used activity, or will higher for longer rates keep the pressure on? Does the company simply have no moat? Did you follow our last trade? For more guidance on trading and investing, check out our popular group below.

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