‘Safe Place in Uneven Macro’: J.P. Morgan Sees Multi-Year Revenue Growth for Auto Marketplace Platforms — Here Are 2 Stocks to Take Advantage

Gasoline or electric, large or small, new or used – no matter what particular model you’re looking for, no matter what you drive or for what reason, cars are here to stay. However, it’s not just about the cars themselves. The automotive industry is a dynamic ecosystem that is constantly evolving. From the continuous advancements in vehicle technology to the ever-changing preferences of car buyers, and the adaptability of car dealers, the entire ecosystem is in a constant state of flux.

Writing from banking giant J.P. Morgan, industry expert and 5-star analyst Rajat Gupta takes the measure of the automotive marketplace, the network of online sites and platforms where buyers and sellers can connect, advertise and display their vehicles, and execute their transactions. Gupta sees the online auto marketplace companies as a safe haven for investors right now, given “undemanding valuation and some cyclical support as new car inventory builds and both dealers and consumers look to get increasingly efficient in buying and selling vehicles.”

According to Gupta, these firms check many boxes, such as, “1) asset-light; 2) right side of cycle; 3) SaaS-like revenue streams; 4) flexible opex (as seen during the pandemic); 5) generative AI applications, internally, and externally; 5) stable earnings and FCF growth in the near to medium term; 6) balance sheet leverage within bounds; 7) not shy of buybacks; and 8) undemanding valuation.”

So, let’s take a look at two of the automotive marketplace stocks that Gupta is recommending for investors right now. These are Buy-rated equities, and Gupta sees a long-term growth story for both. We’ve opened up the TipRanks database to look ‘under the hood’; here are the details.

CarGurus, Inc. (CARG)

We’ll start with CarGurus, an international online platform for buying and selling automobiles, both new and used. The platform includes e-commerce space with industry-leading digital retail solutions and, for wholesalers, the online CarOffer system. CarGurus makes use of sophisticated algorithms and data analytics to make it easy for sellers to list vehicles and buyers to search for them, sorting their search results by a variety of relevant data points: price, mileage, options, accident history, pre-owned certification status, location, and even dealer reputation.

Some of CarGurus’ key metrics will give an indication of the company’s size and scope. As of the end of 1Q23, the company could boast nearly 31,300 paying dealers online, along with 39 million average monthly unique visitors to the site.

Last year, the firm’s revenue total hit $1.655 billion, for a 74% year-over-year increase. However, the first quarter of 2023 reflects more difficult times. Nevertheless, while showing a y/y reduction at the top line, the figure beat the analysts’ forecast. The company registered $232 million in quarterly revenues, a total that was down 46% from the prior-year quarter but was $16.9 million better than had been expected. The company’s bottom line result, of 26 cents per share by non-GAAP measures, was a full 10 cents per share ahead of the forecast.

Investors were also pleased by CarGurus’ Q2 revenue guidance, which is expected in the range of $220 million to $240 million, or $230 million at the midpoint; this gave a favorable comparison to the analysts’ $228.34 million guidance estimates. The stock jumped after the 1Q23 quarterly release and year-to-date, shares in CARG are up approximately 61%.

For top analyst Gupta, CarGurus’ overall market position indicates solid prospects, and he believes that those prospects will only get better as the vehicle market moves toward a normal balance. Gupta writes, “We believe CarGurus is cyclically well positioned, especially within the auto retail ecosystem, as new vehicle supply/demand imbalance normalization should prompt a recovery in dealer ad spend, coupled with potential upside to forward estimates from a quicker-than-expected ramp-up in CarOffer wholesale and C2D volumes amidst broader wholesale market recovery.”

These comments back Gupta’s Overweight (i.e. Buy) rating for the stock, and his price target, of $29, implies an upside potential of 28% in the next 12 months. (To watch Gupta’s track record, click here.)

Overall, CarGurus gets a Moderate Buy consensus rating from the Street’s analysts, based on 9 recent reviews that break down 6 to 3 in favor of the Buys over Holds. (See CarGurus stock forecast)

Cars.com, Inc. (CARS)

The second stock we’ll look at, CARS, has a long history in the tech world. Cars.com got started in 1998, was part of the original dot.com bubble in the late ‘90s, and survived the bubble burst to emerge on the cutting edge of the online automotive marketplace. Cars.com brings a set of digital tools, particularly data and data sorting, so that users can find the right car, from the right dealer, for the right price.

Over the years, Cars.com has evolved, and today it encompasses a full portfolio of brands designed to drive the future of automotive online omni-channel retail. The brands can match buyers and sellers, across tens of millions of listed vehicles and original equipment parts across the US. The flagship brand, Cars.com, attracts more than 27 million in-market car shoppers every month. While the company focuses on facilitating car sales, it has also long catered to car fans generally, and its website has hosted an advice column from the popular Car Talk radio show for 25 years.

Cars.com posted modest growth in 1Q23, showing a top line that increased 6% y/y to reach $167.1 million. That figure was $160,400 above expectations. In non-GAAP terms, the company had earnings of 43 cents per share, a figure that was 1-cent less than expected.

The company saw a drop in cash flow for Q1, compared to the same quarter last year, due to a one-time tax refund transaction. At the same time, cash flow was sufficient to retire $15 million in debt from the revolving loan, and to return $7.2 million to stockholders through share repurchases.

Cars.com also showed some strong online traffic numbers. The firm saw 164.8 million visits, or website traffic, in Q1, for an 11% y/y gain. Drilling down a bit, the average monthly unique visitors were 28.5 million strong, up 7% from the prior-year quarter.

Looking ahead, the firm gave Q2 revenue guidance in the range of $168 million to $170 million. At the midpoint, this guidance suggests a slowdown in y/y revenue growth, to 3% to 4%. The company’s full-year 2023 revenue guidance is for 3% to 6% y/y growth.

Turning to Gupta’s comments, we find him upbeat due to Cars.com’s ongoing changes as it opens up its brand portfolio to offer customers additional products. Gupta believes that these changes will expand the customer base going forward, and bring on new opportunities to grow. Describing this outlook, the analyst says, “While there is likely to be some near-term churn related to digital-only used car dealer cancellations and due to Cars.com’s ongoing price initiatives, we believe a favorable cyclical backdrop characterized by easing OEM supply and normalizing dealer advertising spend should allow Cars.com to tap into growth opportunities provided by its enhanced product suite, coupled with further upside potential as management expands into adjacencies to broaden its TAM.”

Quantifying his stance, Gupta rates the stock as Overweight (i.e. Buy) and gives it a price target of $23, showing his confidence in a 16% upside potential on the one-year time frame.

All in all, there are 5 recent analyst reviews of this stock – all positive, making the Strong Buy consensus rating unanimous. (See CARS stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.