Selling new and used vehicles online has been evolving over many years. CarGurus, Inc. (CARG) was founded in 2005 by Langley Steinert, also a cofounder of TripAdvisor (TRIP), explains Doug Gerlach, growth stock expert and editor of Investor Advisory Service.
The company started as an automotive blog website where consumers could post information about local dealers, repair shops, and auto-related information.
The site has a wide variety of information for those researching, purchasing, or selling a vehicle, including test drive information, new and used vehicle listings, and financing.
For the most popular use of the site, consumers considering the purchase of used vehicles, the company applies a proprietary algorithm to each vehicle to generate a Deal Rating, one of: Great Deal, Good Deal, Fair Deal, High Priced, or Overpriced.
The Deal Rating illustrates how competitive a listing is compared to similar vehicles sold in the same region in recent history. CarGurus’ Deal Rating is backed by the largest number of vehicle listings of any major U.S. online marketplace and dealer reviews by its 36.2 million average monthly U.S. unique visitors.
The COVID-19 pandemic led to a 6% total revenue decline in 2020 after several years of rapid growth. For 2021, the company expects sales to recover as the rollout of COVID-19 vaccinations supports reopening economies. However, earnings are expected to stagnate as the company invests in brand advertising and expands its sales force to sign additional dealers.
Beyond 2021, CarGurus should experience expense leverage that supports more rapid earnings growth. To support long-term growth CarGurus is targeting additional digital retail capabilities and has expanded into the dealer wholesale auction market, defined as dealers selling inventory to other dealers.
For digital retail, the company has introduced Area Boost, a product that allows dealers to market vehicles to consumers without a showroom visit.
Another recently introduced offering, RouteOne, allows the customer to negotiate and complete the sale remotely, including financing, warranties, and after-market product add-ons. With the purchase already completed, the customer simply picks up the vehicle at a specified time.
As for the dealer wholesale auction market, CarGurus in January purchased a 51% stake in CarOffer, a Texas-based private company with an online wholesale auction website that allows dealers to inspect, bid, transact, and transport used vehicles. CarOffer charges the dealer a flat fee of $275 per vehicle plus acquisition costs.
Since its launch in August 2019, CarOffer has grown rapidly, with 2,000 dealers processing $350 million in merchandise and service transactions during the third quarter of 2020. CarGurus paid $140 million for its 51% stake, half in cash and half in stock, and has options through 2024 to purchase the remaining 49%.
Analysts are projecting CarGurus can grow earnings 21% per year. Five years of this growth and our selected high P/E of 35 could generate a stock price as high as 61. We use a low price of 14, the product of calendar year 2020 EPS of $0.68 and the average low P/E of 21.
The upside/downside ratio is 3.5 to 1. CarGurus is well capitalized with cash and investments of $290 million on December 31, 2020 and no debt other than operating leases.