Entering text into the input field will update the search result below

CarGurus: Deceleration And Margin Compression Lurk Ahead

Mar. 04, 2018 12:32 PM ETCarGurus, Inc. (CARG)2 Comments
Gary Alexander profile picture
Gary Alexander


  • CarGurus beat Wall Street estimates yet again for the fourth quarter, its second time reporting earnings as a public company since going public last year.
  • Revenues grew 49% y/y to $85.3 million in the quarter.
  • Operating margins, however, showed a meaningful contraction as product costs and general overhead ticked up.
  • CarGurus shares rallied 11% after earnings, fairly valuing the stock at 10x forward revenues.

CarGurus (NASDAQ: CARG), the used-car marketplace platform for auto dealers, has reported yet another fantastic quarter that has the stock up more than 10%. Since going public last October at $16/share (though shares opened on Day 1 trading at nearly twice that price), CarGurus has been met with plenty of enthusiasm by the markets:

The reasons for this enthusiasm are fairly obvious. First, CarGurus has the distinction of having one of the highest gross margins in the market - in FY17, it generated $299.3 million of gross margin dollars on $316.9 million of revenues, indicating a 94.4% gross margin. This means that, on top of CarGurus' rapid top-line growth (49% y/y this quarter), nearly every incremental dollar of it is dropping into the bottom line. This is the driving reason behind investors' high valuation of CarGurus' revenue stream - a company with such high gross margins can benefit uniquely from greater scale.

Second, CarGurus has a dominant position in the used-car marketplace arena. According to comScore, which tracks internet traffic data, CarGurus is the leading used-car research website. This makes car dealers (2/3 of dealers in the U.S. are customers of CarGurus) rather beholden to CarGurus to draw in business. CarGurus has been able to raise prices for its core offerings while selling more premium listings - as evidenced by its "average annual revenue per subscribing dealer" (AARSD) metric, which grew 16% y/y yet again to $12,055 for U.S. dealers.

Soft guidance betraying a high valuation?

That being said, there is reason to believe that the gas in the tank for CarGurus' rally is running low, as the company reaches a critical inflection point in its high valuation.

For FY18, CarGurus is guiding to the following:

  • Revenue of $396-$400 million.
  • Pro forma operating income of $21-$25 million.

This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (2)

What he ^^^ said.

Conservative guidance is not a sign of slowing growth. They’re just setting themselves up for future beat and raises. You almost said it yourself.

Expenses are higher because ROI on investment is high so they’re investing more.

You had a nice call being long but are blowing it by losing faith. They can grow in many new ways for many years to come.
2/3 of dealers may be customers already, but they are also paying a fraction of what the competition (Cars.com & AutoTrader) charge. Cargurus has already started increasing dealer costs, which dealers will keep paying as long as the return is still there. Cargurus can easily double their current revenue without adding a single new customer.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About CARG

SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on CARG

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.