CarGurus 'One Of The Likely Long-Term Winners' In Online Auto Advertising

After CarGurus Inc CARG’s 18 percent sell-off from the April 10 expiration of its IPO lock-up, D.A. Davidson sees a compelling entry point.

The Rating

Analyst Tom White upgraded CarGurus from Neutral to Buy and maintained a $41 price target.

The Thesis

White compared CarGurus to the profitable and “competitively resilient” Alphabet Inc Class A GOOGL, Zillow Group Inc Class C Z and Booking Holdings Inc BKNG.

“Maximum supply/inventory choice and unbiased data transparency tend to be a winning formula in online marketplace models,” he wrote in a Tuesday note.

The analyst considers CarGurus the fastest grower in online auto advertising and “one of the likely long-term winners” in the space, and he recommends buying while the business momentum is at its peak and consensus estimates remain conservative.

“CARG's 7-times 2019 revenue multiple suggests the market won't have much tolerance for execution hiccups, but we struggle to see what meaningfully derails the momentum of CARG's U.S. business this year,” White wrote.

His bullishness is partly justified by CarGurus’ achievement of scale on both the consumer and supplier sides of the platform. Related spend in marketing and competitive ad rates notably didn't prevent profitable earnings before interest, taxes, depreciation and amortization in 2016 and 2017.

Continued investments in marketing are expected to drive audience growth and support a rise in average annual revenue per dealer.

Price Action

CarGurus initially popped 4.8 percent on the upgrade. At time of publication, shares were trading up 3 percent at a rate of $31.86.

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