CARG - TrueCar's Revenue Turns Up As OEMs Restart Incentives

2023-08-15 16:26:37 ET

Summary

• TrueCar, Inc. beat revenue and EPS consensus estimates in its recently reported Q2 2023 financial results.
• The firm connects car buyers with dealers in the U.S. for new or used automobiles via its online platform.
• Management highlighted a return to sequential revenue growth as OEM incentives began to reappear.
• I remain Neutral [Hold] on TrueCar, Inc. until management can produce sequential revenue growth while materially reducing operating losses.

A Quick Take On TrueCar

TrueCar, Inc. ( TRUE ) Q2 2023 financial results on July 31, 2023, beating revenue and EPS consensus estimates.

The firm connects buyers of new or used automobiles with dealer sellers in the United States.

I previously wrote about TrueCar with a Neutral outlook.

I remain Neutral [Hold] on TrueCar, Inc. stock until management consistently reignites revenue growth for multiple sequential quarters and meaningfully reduces operating losses.

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.

The company also provides online services to its network of automobile dealers.

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

The company’s primary offerings include the following:

For Consumers:

• Pricing research

• Buying assistance

• Financing.

For Dealers:

• Online lead generation

• Pricing transparency

• Marketing and advertising.

The firm acquires consumers 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 due to 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.

Major competitive or other industry participants include:

• Cars.com ( CARS )

• CarMax ( KMX )

• CarGurus ( CARG )

• CarBravo

• AutoNation (AN)

• AutoTrader.com

• KBB.com

• Edmunds.com

• CarsDirect.com

• CarFinder.com.

TrueCar’s Recent Financial Trends

• Total revenue by quarter has produced the following trajectory; Operating income by quarter has worsened further into negative territory.

• Gross profit margin by quarter has varied within a narrow range; Selling, G&A expenses as a percentage of total revenue by quarter have risen materially in recent quarters.

• Earnings per share (Diluted) have worsened further into negative territory recently.

(All data in the above charts is GAAP.)

In the past 12 months, TRUE’s stock price has fallen 12.02% vs. that of CarGurus’ ((CARG)) drop of 11.62%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $142.4 million in cash and equivalents and no debt.

Over the trailing twelve months, free cash used was ($50.6 million), during which capital expenditures were $12.9 million. The company paid $18.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure for the last eleven 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; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

Commentary On TrueCar

In its last earnings call ( Source - Seeking Alpha ), covering Q2 2023’s results , management highlighted its return to sequential revenue growth.

CEO Reigersman also noted its cost reduction initiatives, as it reduced headcount by 24% in mid-June, though it is likely to take several quarters before we see a material improvement show up in the financials.

Notably, the firm is seeing OEM incentive revenue start to return after it had "dried out over the last couple of years."

Total revenue for Q2 2023 fell 7.1% year-over-year, while gross profit margin slid 0.9%.

Selling, G&A expenses as a percentage of revenue grew by 16.2% YoY, and operating losses worsened by 72.7%.

The company's financial position is moderate, with ample liquidity, no debt, but material free cash used, giving the company only about two and one-half years of runway at its trailing twelve-month level of cash burn.

Looking ahead, consensus estimates for revenue in 2023 indicate a potential decline of 0.5%.

If achieved, this would represent a reduction in revenue decline versus 2022’s decline rate of 3.06% versus 2021.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Macro" four times and "Drop" once.

Analysts questioned company leadership about the timing and extent of the operating expense reduction from the workforce reduction.

The company expects to see "some benefits" in Q3 and Q4 2023 but probably won’t see the full $20 million in expense reduction until 2024.

A potential upside catalyst to the stock could include a continued rebound in OEM incentives as they seek to lure consumers back to showrooms in the face of a higher interest rate environment and increased inventory levels as supply chain issues continue to subside.

Another potential upside is the company's rollout of its TrueCar Plus online system as a personalized improvement for consumer adoption of the company’s platform.

It is difficult to determine the various cross-currents affecting the company's prospects as the U.S. economy continues to face the prospect of a recession, at least according to recent leading economic indicators.

I remain Neutral on TrueCar, Inc. stock for the time being and until management can consistently reignite revenue growth and meaningfully reduce operating losses.

For further details see: