2 Analysts Mixed On CarGurus

CarGurus Inc CARG reported fourth-quarter results that prompted a 5.5-percent sell off in the stock Friday and has Street analysts mixed if investors should be buyers of the stock or not.

Benchmark: Priced With Free Optionality

Cargurus reported a typical earnings report highlighted by a revenue and EBITDA beat driven by 23 percent average annual revenue per subscribing dealer (AARSD) growth, Benchmark's Dan Kurnos said in a research report. Dealer count was a "pleasant surprise" as it grew 10 percent year-over-year or by 400 net dealers from the third quarter to 27,534.

Despite multiple encouraging metrics in the quarter, management's 2019 guidance was mostly in-line with expectations. On one hand, the domestic business looks to be growing profit better than expected while the international business is poised to become a more meaningful contributor of growth. On the other hand, the magnitude of outperformance compared to guidance "looks somewhat capped" unless the company sees a large uptake of new products.

Kurnos said a low- to mid-revenue growth in the 20 percent range through 2020 looks achievable and management should be able to make the case for margin expansion over the medium-term.

Kurnos maintains a Buy rating on CarGurus with an unchanged $50 price target.

Related Link: Online Auto Sales: BTIG Bullish On TrueCar, CarGurus

Raymond James: Premium Valuation

CarGurus' "solid quarter" includes a few positive takeaways with just one negative readout, Raymond James' Aaron Kessler said in a research report. On the positive side:

• ARSD growth in the fourth quarter could be sustained throughout 2019 from new product sales, pricing, packaging and a retargeting product that management said is seeing good early traction;
• Net adds of U.S. dealers of 406 came in more than double the 200 expected and solidifies the company's brand and CarGuru's strong return on investment; and
• S&M leverage improved 390 basis points year-over-year to 67.1 percent of revenue.

And on the negative side:

• U.S. average monthly unique user growth slowed down from 43 percent in the third quarter to 29 percent year-over-year in the fourth quarter. The company highlighted seasonality and lower ad spend in the typically slower quarter for overall auto sales.

Despite a positive stance on CarGurus' fundamental outlook, Kessler said the stock's valuation at around 8.5 times 2019 estimated EV/revenue is already a premium to internet market place peers at 5.5 times. As such, investors should consider remaining on the sidelines.

Kessler maintains at Market Perform, no price target.

Price Action

Shares of CarGurus traded down 2.4 percent at $39.38 Monday afternoon.