TrueCar Stock Appreciates Even As Morgan Stanley Says Fundamentals Have Worsened

Following the surge in TrueCar Inc’s TRUE, valuation has “gotten ahead” of the company’s fundamentals, Morgan Stanley’s Brian Nowak said in a report. He downgraded the rating on the company from Equal-weight to Underweight, while establishing a price target of $6.40, reflecting 28 percent downside.

Expensive Stock

TrueCar’s shares have jumped ~80 percent from their February lows, backed by expectations of the new CEO Chip Perry being able to achieve a turnaround of the company, with improved net funnel efficiency and profitability, analyst Nowak mentioned. He added, however, that while shares appreciated, the company’s fundamentals had continued to deteriorate.

The consensus adjusted EBITDA estimate for 2017 has been reduced by 70 percent. “TRUE is now the most expensive stock in our coverage group when looked at on growth-adjusted multiples,” Nowak noted.

Weak Performance

So far, TrueCar has witnessed a continued decline in conversion; and total company unit growth has decelerated from over 20 percent y/y to 1 percent. The downturn has been led by declines in the TrueCar Branded channel, the analyst stated.

There has also been a slowdown in traffic growth to the site to 12 percent y/y in Q2, with TrueCar failing to add any new users sequentially for the first time.

“In our view, TRUE will need a method (increased ad spend?) to grow MAUs if it hopes to drive materially higher total unit sales,” Nowak commented, while adding, “These trends make us cautious about the trajectory of forward top-line as we reduce our 2017/2018 revenue estimates by 5%/8%.”

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