TC+ Marketplace And AI Tools Will Expand Dealer Engagement

Key Takeaways

• The launch of TC+ and improved AI tools may drive revenue growth and net margin improvement by capturing market share and reducing transaction costs.
  
• Expanding dealer networks and OEM partnerships aims to increase revenue, margins, and efficiency through better dealer engagement and targeted incentives.
  
• Significant investment in sales and marketing could increase expenses, while reliance on new partnerships and system integrations may impact revenue growth and margins.

Catalysts

Operates as an internet-based information, technology, and communication services company in the United States.

• The launch and expansion of TC+ as the first digital marketplace for buying and selling new, used, and certified vehicles entirely online could drive significant revenue growth through increased transaction volumes and capturing a larger market share.
  
• Enhancing AI-powered fraud prevention tools and improving integration with Dealer Management Systems (DMS) will streamline operations, likely improving net margins by reducing transaction costs and operational inefficiencies.
  
• Strong pipeline and plans to expand the franchise dealer network and minimize dealer churn, coupled with increased dealer sales and service headcount, indicate potential for increased revenue and improved net margins due to greater dealer engagement and retention.
  
• Investment in a real-time machine learning platform in partnership with AWS to enhance consumer insights and lead conversion rates may drive higher earnings through increased consumer retention and improved dealer service efficiency.
  
• OEM partnerships and the expansion of affinity partner programs are expected to boost OEM incentive revenues, which would enhance both revenue growth and net margins by increasing the efficiency of targeted incentives and protecting OEM vehicle residual values.

TrueCar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TrueCar's revenue will grow by 12.4% annually over the next 3 years.
• Analysts are not forecasting that TrueCar will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TrueCar's profit margin will increase from -19.7% to the average US Interactive Media and Services industry of 10.8% in 3 years.
• If TrueCar's profit margin were to converge on the industry average, you could expect earnings to reach $27.6 million (and earnings per share of $0.35) by about July 2028, up from $-35.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from -5.0x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 3.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

TrueCar Future Earnings Per Share Growth

Risks

• Significant investments in sales and service headcount and marketing efforts may result in increased operating expenses, impacting net margins and potentially leading to negative adjusted EBITDA in the near term.
  
• The loss of American Express as an affinity partner has created a temporary gap in OEM revenue, which may affect revenue growth until the new partnership with Mercedes and other affinity partners ramps up.
  
• The integration of TC+ with dealer management systems (DMS) and the transition to an automated system may face delays or challenges, potentially impacting the anticipated revenue growth and operational efficiency.
  
• The churn rate among independent dealers, particularly in a high-interest rate environment and with elevated used car prices, may continue to impact overall dealer network growth, which could affect unit sales and revenue per dealer.
  
• The ambitious revenue growth targets are contingent upon successfully capitalizing on the OEM incentive opportunities, which are subject to market conditions and OEMs’ budget allocations, potentially affecting long-term revenue projections.

Valuation

• The analysts have a consensus price target of $2.53 for TrueCar based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.25, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $254.4 million, earnings will come to $27.6 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 7.7%.
• Given the current share price of $2.03, the analyst price target of $2.53 is 19.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.