DA Davidson Bullish On Cars.com, Ambivalent On Competitors

The expanding online marketplace for vehicles was assessed in a D.A. Davidson report released Tuesday.

The Ratings

D.A. Davidson’s Tom White initiated coverage on:

  • CarGurus Inc CARG with a Neutral rating and $41 price target;
  • Cars.com Inc CARS with a Buy rating and $34 price target; and
  • TrueCar Inc TRUE with a Neutral rating and a $9.75 price target.

The CarGurus Thesis

The momentum behind last year’s positive net income is expected to continue in 2018 with “robust” audience growth for CarGurus, White said. 

With a model leveraging unbiased data and wide choice, the company can capitalize on a complex and fragmented industry’s rapid shift to digital consumer engagement to tap into a $30-billion auto dealer advertising market, the analyst said. 

“Against this backdrop, the race to achieve scale is critical, and CARG has deftly accomplished this on both the demand/consumer-side of its platform (via significant investment in customer acquisition marketing) and on the supplier/inventory side (by offering dealers a free-to-list/freemium model and by pricing its ad packages below competitors)." 

D.A. Davidson considers CarGurus' guidance to be conservative and expects the company to withstand intensified competition through its reputation as a high-returns lead source.

The Cars.com Thesis

At the same time, Cars.com boasts the brand recognition, established salesforce and wide data properties of the space’s oldest scaled publicly-traded player.

“Moreover, we expect the post-spin CARS to benefit from a more focused management team and board, more streamlined decision-making and a faster pace of product innovation,” White said. “These factors should enable CARS to re-accelerate its growth rate against a very large market opportunity.”

White said he considers the firm an “under-the-radar” gem, particularly considering its leading earnings before interest, taxes, depreciation and amortization margins last year.

The TrueCar Thesis

TrueCar’s platform provides transaction price data on local car sales, and its strategy is seen to ensure returns for car dealers.

“If executed correctly and at scale, TRUE’s model could be a long-term category killer in automotive marketing, in part because it delivers what we view to be the ‘holy grail’: turning a marketer’s 'advertising expense' into ‘cost of revenue,’” White said.

Nonetheless, the company’s ongoing retooling efforts and the threat of rising competition justify a hold rating, the analyst said:  White is waiting for proof of improved conversion rates and progress toward margin expansion.

Price Action

At the time of publication, TrueCar was down 1.4 percent at $9.27, Cars.com was down marginally at $27.95 and CarGurus was up 0.37 percent at $36.71.

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