TRUE - TrueCar's Fundamentals Stabilize As Car Market Rebalances

2023-11-16 16:09:47 ET

Summary

• TrueCar, Inc. beats revenue estimates in Q3 2023 by approximately $170,000.
• TrueCar operates an online marketplace for automobile purchases in the United States.
• The company's fundamentals are improving, but it may not return to high growth or achieve operating breakeven in the near term.
• I remain Neutral [Hold] on TrueCar, Inc. for now.

A Quick Take On TrueCar

TrueCar, Inc. ( TRUE ) reported its Q3 2023 financial results on November 6, 2023, beating revenue estimates by approximately $170,000.

The firm operates an online marketplace for automobile purchases in the United States.

I previously wrote about TRUE with a Hold outlook on the potential for revenue growth due to a return to OEM incentives in a less supply-constrained automobile purchase market.

TrueCar, Inc. fundamentals are improving as the car business gradually returns to normal, but I’m not convinced the company will return to high growth or even continue material progress toward operating breakeven.

Accordingly, my outlook for TRUE remains Neutral [Hold] in the near term.

TrueCar Overview And Market

Santa Monica, California-based TrueCar, Inc. was founded in 2005 to enable consumers to research and purchase cars via its online marketplace.

TRUE also provides online services to its network of automobile dealers.

The firm is led by President and CEO Jantoon Reigersman, who was previously Chief Financial Officer at Leaf Group and CFO at Ogin.

TrueCar’s main offerings include:

For Consumers:

• Pricing research

• Buying assistance

• Financing.

For Dealers:

• Online lead generation

• Pricing transparency

• Marketing and advertising.

TRUE acquires consumer users primarily via online marketing and partnerships and pursues dealer relationships through its direct sales and marketing efforts.

According to a 2022 market research report by Mordor Intelligence, the U.S. market for used automobiles was estimated at $196 billion in 2021 and is forecast to reach $302 billion by 2027.

This represents a forecast CAGR of 7.51% from 2022 to 2027.

An important driver for this expected growth is a return to normalcy after supply chain shocks as a result of the pandemic and other factors.

However, a rising interest rate environment has reduced automobile affordability for certain consumers, leading to variability in demand and price in recent months.

As a result, observers expect a buildup of new vehicle inventory towards the end of 2023, influenced by higher-than-normal interest rates and flagging consumer demand. Manufacturer incentives are also at a two-year high, helping car marketplace operators.

The chart below shows the last twelve months of U.S. car inventories, per the St. Louis Fed. Inventories have been rising quickly since about February of 2023:

Major competitive or other industry participants include:

• Cars.com ( CARS )

• CarMax ( KMX )

• CarGurus ( CARG )

• CarBravo

• AutoNation

• AutoTrader.com

• KBB.com

• Edmunds.com

• CarsDirect.com

• CarFinder.com.

TrueCar’s Recent Financial Trends

Total revenue by quarter (blue columns) has returned to slight year-over-year growth; Operating income by quarter (red line) has improved markedly but still remains materially negative:

Gross profit margin by quarter (green line) has remained fairly stable in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have dropped sharply recently:

Earnings per share (Diluted) have improved recently, although they still are substantially negative:

(All data in the above charts is GAAP.)

In the past 12 months, TRUE’s stock price has risen only 0.39% vs. that of CarGurus, Inc.’s ((CARG)) rise of 48.53%:

What is notable about the chart is that the two stocks diverged sharply in late February 2023 from earnings results, with TRUE dropping sharply as it produced two negative earnings surprises.

Since the middle of 2023, earnings surprises have been positive, leading to stabilization of the stock's price action.

For balance sheet results, the firm ended the quarter with $143.3 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was a hefty $38.3 million, during which capital expenditures were $12.8 million. The company paid $16.4 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For TrueCar

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be CarGurus:

(Source - Seeking Alpha.)

A complete comparison of the two competitor’s financial results and metrics may be viewed here .

TRUE’s most recent unadjusted Rule of 40 calculation was negative (32.4%) as of Q3 2023’s results, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Commentary On TrueCar

In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted what it believes is an improvement in the macroeconomic environment within the industry.

This means increases in inventories of cars available for sale and a reduction of the percentage of new car sales over MSRP year-over-year, to 39%.

Also, average new car incentives grew 129% YoY to $2,367, so management believes "the tide has started to turn in our favor."

The firm continues to make progress on redesigning its online product flow for consumer purchases, with plans to launch its EV flow in December.

In the earnings call, I tracked the frequency of certain keywords and terms used by management and analysts, as shown in the chart below:

Management commented that while macro conditions have improved recently, it believes there is still "a ways to go before the macroeconomic environment returns to historical norms."

Analysts questioned leadership about its growth strategies, product development and dealer network.

Management said that it is focused on organic growth, reducing churn, and that operating leverage is good due to a relatively stable cost base.

The firm continues to make progress on improving customer engagement through its aforementioned progress on redesigning the flow of the customer journey online.

Leadership said that it is focusing on expanding and improving its dealer network, with particular emphasis on forward-leaning dealers who are embracing new technologies more.

Total revenue for Q3 2023 rose by 5.1% year-over-year, and gross profit margin increased by 0.7%.

Management didn’t disclose any customer or revenue retention rate metrics but said its dealer churn would fluctuate over the next quarter or two.

Selling and G&A expenses as a percentage of revenue dropped by an impressive 14.5% YoY but remain quite high.

Operating losses were reduced by 49.2% year-over-year to $9.3 million for the quarter.

The company's financial position is somewhat concerning. It has ample liquidity for the near term and no debt, but free cash used in the past four quarters was $38 million, so management needs to reduce cash outflow.

Looking ahead, 2023 full-year revenue decline is expected to be (1.6%), versus 2022’s decline of 30.3% against 2021’s results.

A potential upside catalyst to the stock could include continued progress in supply/demand balancing, resulting in a more favorable environment for the firm’s services.

However, in a higher interest rate environment, consumer demand for automobiles may be destroyed due to credit availability or deteriorating creditworthiness.

Also, the company's work on redesigning its EV purchase flow is occurring just as OEMs are pulling back from the EV market due to low consumer demand beyond the early adopters.

While TRUE’s fundamentals may be improving as the car business gradually returns to normal, I’m not convinced of the firm’s imminent jump in growth or continued progress toward operating breakeven.

Accordingly, my outlook for TrueCar, Inc. remains Neutral [Hold] in the near term.

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