Online new and used car marketplace Cars.com (NYSE:CARS) reported results in line with analysts' expectations in Q3 FY2023, with revenue up 5.92% year on year to $174.3 million. The company also expects next quarter's revenue to be around $178 million, in line with analysts' estimates. Turning to EPS, Cars.com made a GAAP profit of $0.07 per share, improving from its loss of $0.04 per share in the same quarter last year.
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Cars.com (CARS) Q3 FY2023 Highlights:
Revenue: $174.3 million vs analyst estimates of $173 million (small beat)
EPS: $0.07 vs analyst expectations of $0.10 (27.9% miss)
Revenue Guidance for Q4 2023 is $178 million at the midpoint, roughly in line with what analysts were expecting
Free Cash Flow of $30.4 million, up 33% from the previous quarter
Gross Margin (GAAP): 82.2%, up from 69.5% in the same quarter last year
Dealer Customers: 18.7 thousand, down 870 year on year
"During the quarter, we made strong strategic moves that advanced our platform strategy and unlocked future growth. We launched Cars Commerce, our new B2B brand, reflecting our commitment to unite the industry by simplifying car buying and selling for consumers, dealers, OEMs and lenders. We delivered strong results for the quarter driven by increased market adoption of our products. We are also excited about our acquisition of D2C Media Inc., which further extends our Canadian presence and growth opportunities," said Alex Vetter, Chief Executive Officer of Cars Commerce.
Originally started as a joint venture between several media companies including The Washington Post and The New York Times, Cars.com (NYSE:CARS) is a digital marketplace that connects new and used car buyers and sellers.
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission-paying sellers, generating flywheel scale effects that feed back into further customer acquisition.
Cars.com's revenue growth over the last three years has been unremarkable, averaging 8.54% annually. This quarter, Cars.com reported mediocre 5.92% year-on-year revenue growth, in line with what analysts were expecting.
Guidance for the next quarter indicates Cars.com is expecting revenue to grow 5.83% year on year to $178 million, in line with the 6.25% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 5.17% over the next 12 months.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
As an online marketplace, Cars.com generates revenue growth by increasing both the number of buyers on its platform and the average order size in dollars.
Over the last two years, Cars.com's active buyers, a key performance metric for the company, grew 0.28% annually to 18.7 thousand. This is one of the lowest rates of growth in the consumer internet sector.
Unfortunately, Cars.com's active buyers decreased by 870 in Q3, a 4.44% drop since last year.
Key Takeaways from Cars.com's Q3 Results
Sporting a market capitalization of $1 billion, Cars.com is among smaller companies, but its more than $49.1 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
We struggled to find many strong positives in these results. Although its revenue growth slightly beat analysts' estimates, its user base fell. In terms of big strategic moves, Cars.com announced its acquisition of D2C Media, which will help the company expand into Canada. Overall, this was a mediocre quarter for Cars.com. The stock is flat after reporting and currently trades at $15.05 per share.
Cars.com may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.
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The author has no position in any of the stocks mentioned in this report.