CarGurus Could Be In The Fast Lane To Outperformance

William Blair initiated coverage of CarGurus Inc CARG with an Outperform Monday, reasoning that dollars will flow along with web traffic. 

CarGurus Inc IPO-ed  Oct. 12, offering 150.40 million shares priced at $16. The quiet period on the IPO expired Monday. After listing at $29, the stock closed its debut session at $27.58, an impressive 72-percent gain. Since then, the stock has been largely on an uptrend.

At the time of writing, CarGurus shares were down 4.50 percent at $30.02.

CarGurus attracts more traffic than three of its closest competitors combined — namely Autotrader, Cars.com Inc CARS and TrueCar Inc TRUE — analyst Ralph Schackart said in a Monday note. 

CarGurus also boasts the most listed inventory of the four, the analyst said. (See Schackart's track record here.)

Will Ad Dollars Follow Car Shoppers' Clicks? 

William Blair sees enormous opportunity in the digital car shopping space: Just 57 percent of ad dollars are siphoned to online sources, despite 75 percent of the time consumers spend researching and shopping for cars being online. With ad dollars likely to track with eyeballs, William Blair expects online auto market places such as CarGurus will continue to gain share of the auto industry's $35 billion-plus ad spend.

CarGurus is an impressive platform that drives an efficient return on investment, Schackart said. CarGurus has the potential to price at an estimated range of at least 10- to 20-times its return, translating to revenue of about two to four times what the company generated from the value of its leads in 2016, according to William Blair. 

As opposed to competitors that charge a premium to dealers for their listing to show up high in search rankings, CarGurus offers a more consumer-friendly model that's more restrictive on the types of deals it allows to rank high in search results, Schackart said. This will help CarGurus snatch market share from rivals, the analyst said. 

The risks for CarGurus include search engines updating their algorithms in a way that pushes its site lower in results, Schackart said. The company could also underperform if it does not pass along price increases to its subscribing dealers, the analyst said. 

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