Analyst Remains Positive On CarGurus' New Model But Takes Cautious View As Used Car Demand Slows

  • Needham analyst Chris Pierce has reiterated a Buy rating on the shares of CarGurus Inc CARG with a price target of $16.00.
  • The analyst lowered 1Q23 and full year profitability estimates for CARG, entirely on lower CarOffer (CARG's wholesale business). Weak 4Q22 wholesale industry performance leads the analyst to believe it will take longer for CARG to fix this business, given internal execution issues flagged on the 3Q22 earnings call.
  • The analyst also lowered the EBITDA estimate for CARG, removing it from the Needham Conviction List at this time in favor of ACV Auctions Inc ACVA.
  • While the analyst still believes the sum of the parts of the new CARG post the acquisition of CarOffer is more valuable vs. the prior CARG, he is more cautious on the wholesale end market in the immediate term, given industry data into year-end.
  • The analyst thinks CARG may have to do a full reset of CarOffer in the marketplace, pushing out better execution as ACVA flexes its market-leading position against a backdrop of potential unit growth in '23.
  • The analyst thinks CARG would be uniquely positioned as an asset light operator, operating a take rate model, vs. an inventory heavy model.
  • The analyst thinks CARG's multiple can expand as it shifts from primarily operating a lead-gen model to a fuller product suite helping dealers source buyers, transact digitally, and source and move inventory digitally.
  • Price Action: CARG shares are trading lower by 3.23% at $14.40 on the last check Thursday.
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