Analysts Downgrade TrueCar, Forecast Weak Fundamentals

The Street had little love for TrueCar Inc TRUE this Valentine’s Day. Analysts pulled back when the online auto market reported an earnings miss and issued weak guidance.

The Ratings

RBC Capital analyst Mark Mahaney downgraded TrueCar to Sector Perform and cut his price target from $12 to $9.

Benchmark analyst Dan Kurnos maintained a Buy rating but lowered his target from $16 to $11.

The Theses

RBC attributed the underperformance to four issues: operational challenges in the OEM business and legacy system; traffic-killing SEO headwinds from Alphabet Inc GOOGL’s algorithm changes; affinity partners’ delay in adopting the new cloud-based Capsella tech stack; and struggles to attract new independent dealers.

Mahaney expects fundamentals to continue weakening through 2019, with unique visitors and revenue growth notching negative inflections.

“Our Outperform call hasn’t worked – we underestimated the execution challenges facing TRUE,” he wrote in a note. “...Revenue growth acceleration is now maybe a 2020 event (due to delayed benefits from product improvement, continuing SEO headwinds, and weaker-than-expected OEM outlook).”

Kurnos expects traffic and ranking headwinds for the next half year, but is nonetheless more optimistic than Mahaney.

“Perhaps we’re missing our chance to get off the bus a stop too late but it feels like numbers will come in towards the low end of guidance (like ours) and that the majority of the negative news is now out in the open,” he wrote, forecasting a 20-percent decline in the stock.

By his estimate, traffic or ranking improvements, Capsella’s consumer growth or OEM recovery could drive upside to current guidance. He concedes risk in the USAA negotiation but anticipates a favorable outcome given a lack of options for both parties.

Analysts at B. Riley FBR also downgraded the stock to Neutral, and lowered the price target to $9.50

Price Action

At time of publication, TrueCar traded down 18.5 percent at $8.35.

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