Buying stock in CarGurus/Cars.Com

[unclejack123]

Hi,

I'm not a car dealer nor do I work for a dealership. I am, however, interested in conducting some research as part of effort to value CarGurus.com and Cars.com for different reasons.

1. I have read reports that CarGurus gets more web traffic than Cars.com. Logically, it would follow, that CarGurus would be more desirable from the dealership's perspective than Cars due to this higher reported traffic. Is this the case? Do you desire CarGurus more than Cars? Do you pay more to CarGurus than to Cars.com for access?

2. What's the long-term outlook for car dealership's expenditures on CarGurus, Cars.com, AutoTrader, and the constellation of other websites. Are car dealers going to pick one winner? Thus, will this be a winner-take-all situation? Or is there room for multiple such websites to continue existing alongside each other? Are you guys able to afford paying X to CarGurus, Y to Cars.com, and Z to AutoTrader, and various other amounts to other websites? Is X+Y+Z a sustainable spend?

3. Do you think CarGurus has pricing power? If, next year, they decided to jack up their costs by 15%, would you say no thanks?

4. Has the emergence of these websites been a net negative to your bottomline? It would seem that if there's a dealership 50 minutes away from your target suburb with a better deal for numerous makes/models, those customers would have to do a lot more legwork to learn of those deals before these websites came into existence. For example, such a customer would have to make multiple visits to multiple websites and manually price compare. These websites with their "within 100 mile radius" results minimizes this transaction cost, seemingly to the detriment of dealerships and to the benefit of the end customer. Were margins better before these websites?

I'm obviously trying to do some investment due diligence with all this. I'm not sure there's anything in it for you to answer all these questions. I'll take what I can get. I appreciate your time and attention.

Amit

 

[Alex Snyder]

Interesting topic Amit. Also cool that you found DealerRefresh for this kind of research

Although our opinions are just opinions, I can say that I find the current market to be skewed towards stories instead of reality. CarGurus tells a good story, but they're pissing dealers off left and right. A quick search of these forums will show you that.

CarGurus, Cars.com, and Autotrader will be advertising hubs for dealers for a long time. They have the name power, OEM relationships, and SEO strength. Dealers can't compete with them on their own on a store by store basis. If dealer group consolidation continues to ramp there will come a day when a behemoth dealer group will be able to dictate the market. That's still years away.

CarGurus is testing to see how far they can go with their increases. It is questionable whether they've hit that plateau already. And if so, it does not bode well for them if they need the extra cash to buy more SEM placement.

These are my observations as I have followed the news of the third party classified sites on DealerRefresh. I'm also posting in hopes someone will pick up my start and give a bit more.

 

[Jeff Kershner]

Ditto on what Alex wrote. Not sure I have anything to add.

 

[Tallcool1]

You are asking really good questions Amit. Questions that will get you a great deal of varying answers for sure.

There is room for CarGurus, Cars, and AutoTrader because they are quite different products. I know that there are dealerships that do well with all 3 of these providers, but I don't know any of them. My specific peer group will do well with 1 or 2, but rarely all 3.

I believe the reason for this is due to different business models. A dealer that chooses a very aggressive pricing strategy and favors inventory turns to average gross profit may do well with CarGurus. CarGurus places a much higher emphasis on vehicle price, and tries to help the consumer determine if a vehicle is priced "fair".

A dealer that is more interested in lead quality than they are lead quantity (they don't provide as many leads but what they do provide are much more qualified) may do better with Cars. Cars seems to focus on the quality of the vehicle and seems to take more of a marketplace approach than a lead provider approach.

AutoTrader I really can't speak to because I have never really done well with them.

CarGurus does get more traffic, but they also charge dealers a lot more money to advertise on their platform. CarGurus is the only of these 3 that I could ever see myself dropping due to rate increases. At some point the advertising cost tips the roi scale. As Alex said above, CarGurus can absolutely tip the scale in certain situations.

Have these sites been a negative on the bottom line? Wow, that is a loaded question. I guess that would be a store by store situation. What these sites have done is tremendously impacted the customer experience in a negative way. Some dealerships now misrepresent their vehicles in an effort to give the impression that they are priced more aggressively than they really are. They are adding vehicle equipment that is not on the vehicle. They add complex disclaimers that basically force the customer to purchase additional products or financing packages. They take misleading photos that give a less than accurate impression of the vehicle. This list goes on.

These are my observations. Others in the group will have a different view due to being in different markets.

 

[Ryan Montville]

Everything Alex said plus:

Car dealerships have egos. If your product provides value, but you do shady things, dealerships respond with cancelations. Cargurus may have the most traffic, but if their customers aren't happy (car dealers), how long will that last? The volatility of Cargurus' marketing direction will dictate the volatility of the stock price imo.

I would recommend looking at the history of TrueCar as a comparison. TrueCar went through a huge battle after their advertising smacked dealers in the face. Like CarGurus, the dealerships were TrueCar's customer. At the time, TrueCar was a pretty valuable partner for many dealers. After their marketing stunt, it took a loooooong time for them to recover....and I'm still not convinced they have.

With regards to your questions:

1. We see more traffic from CG. Comparing cost for each is tough because each vendor has upsell products, and those are up to the discretion of each store. You also have to consider what else is included. CG is just a third party website to list vehicles. Cars.com includes other companies like Dealer Inspire, Dealer Rater, etc. You would need to research to see what else is included within these companies.

2. There will never be one site to rule them all. There is room for all sites. With 30 day cancelation options on most contracts, many dealers can have any combination of all the sites you listed at any point.

3. This is based on how each dealer tracks/judges their third parties. I know many dealers that would say no thanks, especially on the back end of shady dealings on CG's part.

4. This one is tough. Some of these sites are as old as the www. I think it's more fair to ask "Do you see a bottom line impact when you are engaged with these sites vs when you aren't?" The answer to that is probably not. If you could develop an attribution product that answers this with 100% certainty, you'd never have to work again.

 

[Dan Sayer]

3. This is based on how each dealer tracks/judges their third parties. I know many dealers that would say no thanks, especially on the back end of shady dealings on CG's part.

@Ryan Montville what/when were the shady dealings you are speaking of?

 

[Ryan Montville]

@Ryan Montville what/when were the shady dealings you are speaking of?

Hey Dan, long time no talk! You were one of my contacts at DI back in the day!

The biggest most recent one was their partnership with Carvana last year on vehicle acquisition. Their reps at NADA last year told us they were getting hammered by everyone. I think I remember them leaving NADA early because of it. I was also told this week, that we are being charged different amounts for stores with the same inventory levels because "leads for one brand are more valuable than others." Combine that with constant astronomical price hikes, and one gets the feeling that they are just making things up as they go.

 

[Dan Sayer]

Hey Dan, long time no talk! You were one of my contacts at DI back in the day!

The biggest most recent one was their partnership with Carvana last year on vehicle acquisition. Their reps at NADA last year told us they were getting hammered by everyone. I think I remember them leaving NADA early because of it. I was also told this week, that we are being charged different amounts for stores with the same inventory levels because "leads for one brand are more valuable than others." Combine that with constant astronomical price hikes, and one gets the feeling that they are just making things up as they go.

@Ryan Montville LOL, I knew your name was familiar but couldn't put my finger on it! Now I feel like a jerk
Back to the Carvana thing, I think there's a thread in here about that whole incident and CarGurus' admission it was a mistake. I would chalk some of their moves up to them legit being a little clueless about the emotional state of dealers and their attitude towards Carvana. I don't think their pricing will ever be the same based on dealer size and package because they're a lot like Cars in the way they price. The DMA gets a price ranking as well it seems like the rep has some control on timing of price increase. I still pay a little more for Cars than CarGurus.

@unclejack123 Amit, just curious if you're with a private equity research firm? I've had about a half-dozen calls in the last 6 months with various research analysts asking the exact questions you are so this must still be a pretty hot prospect. You may be picking up on dealers tend to be a little more emotional in making decisions than just looking at numbers. I would say that is CarGurus' largest hurdle since making moves, like what Ryan referred to, that'll be tough to overcome with the dealer body.

 

[unclejack123]

The stock of this company has dropped considerably since my original post (from $30 to around $24 at the time of this post). That's a 20% drop in a little over a month. Pretty gnarly.

The valuation is interesting. $2.7B or thereabouts for a company that will probably earn $150-200M in five or six years if they keep up their net income growth trajectory. Of course, that'll need this company to double its revenues in five years, which in turn requires them to jack up their dealership fees by 15% each year, sign up 15% more dealerships, or some combination of the above. It isn't outside the realm of the reasonable that this company will devise new ways to generate revenues through acquisitions or what not. They have a pretty spotless balance sheet. It's kind of an incredible business from every metric (return on assets, return on tangible assets, return on equity) and virtually no debt.

Very curious about the current valuation.