AI And Digital Transactions Will Revolutionize Auto Buying

Key Takeaways

• Integration of new dealer tools and AI-driven digital bundling positions Cars.com to disrupt legacy channels and capture high-margin, recurring revenue streams above expectations.
  
• Enhanced proprietary data, OEM partnerships, and rising dealer adoption enable rapid growth in premium advertising and SaaS income, driving sustained margin expansion.
  
• Disruptive industry trends, shifting consumer behavior, and heightened competition threaten Cars.com's core revenues, market position, and long-term resilience amidst accelerating changes in auto retailing.

Catalysts

An audience-driven technology company, provides solutions for the automotive industry in the United States.

• Analyst consensus sees significant value from AccuTrade and DealerClub's integration, but this likely understates the platform effect as major dealer groups deploy these tools enterprisewide, enabling Cars.com to disrupt legacy auction and wholesale channels and capture larger shares of multi-billion dollar transaction streams, potentially driving recurring, high-margin revenue at a scale well above $100 million annually.
  
• While analysts broadly expect revenue and margin expansion from marketplace and website repackaging, the full impact is likely underestimated: as more sophisticated, AI-driven packaging and cross-selling accelerate, Cars.com can rapidly move up-market on ARPD and enable SaaS-like earnings leverage, lifting net margins beyond expectations due to the high incremental profitability of bundled digital solutions.
  
• Rapid improvements and adoption of AI-powered search, lead intelligence, and editorial personalization are expected to increase conversion rates and engagement well beyond what most e-commerce marketplaces can achieve, positioning Cars.com as a top beneficiary of the accelerating digital shift in car buying and substantially supporting both revenue growth and advertising ARPU over the medium and long term.
  
• Growing dealer adoption of Cars.com's comprehensive digital commerce platform-including end-to-end transaction tools, appraisal, CRM, and website products-drives customer stickiness, lowers churn risk, and unlocks higher recurring SaaS revenue; this is amplified by increasing demand from dealers to shift away from traditional marketing and inventory sourcing channels, forming a powerful tailwind for long-term net margin and earnings growth.
  
• The company's robust investments in proprietary first-party consumer data, coupled with close OEM partnerships and a recognized brand, uniquely position Cars.com as the leading source of trusted automotive consumer insights; this enables premium-tier advertising and OEM spend to consolidate on its platform, growing high-margin ad revenue faster than expected as automotive marketing budgets migrate rapidly to performance-driven, data-rich digital channels.

Cars.com Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cars.com compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cars.com's revenue will grow by 3.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 5.7% today to 10.3% in 3 years time.
• The bullish analysts expect earnings to reach $81.3 million (and earnings per share of $1.3) by about August 2028, up from $41.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, up from 18.0x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 6.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.55%, as per the Simply Wall St company report.

Cars.com Future Earnings Per Share Growth

Risks

• The acceleration of direct-to-consumer sales models by automakers, such as electric vehicle manufacturers bypassing traditional dealerships, may reduce dealers' reliance on third-party marketplaces like Cars.com, leading to lower platform traffic and diminished long-term revenue potential.
  
• The rise of shared mobility solutions and a potential shift toward autonomous vehicles may gradually shrink the overall demand for individual vehicle ownership, compressing the addressable market for Cars.com and putting persistent pressure on the company's core listing revenues over time.
  
• Cars.com faces intensifying competition from larger, diversified players such as CarGurus, AutoTrader, Facebook Marketplace and even new entrants like Amazon's automotive efforts, which could drive market share losses and reduce pricing power, ultimately compressing margins and impacting net income.
  
• The company remains heavily dependent on traditional dealership ad spending, yet structural changes in auto retailing-especially OEMs prioritizing flexibility and shifting budgets, as well as the push for online and direct sales-could create recurring volatility and reduce resilience in advertising and subscription-based revenues.
  
• Generative AI and alternative search or transaction platforms could disintermediate traditional online portals, and despite Cars.com's brand strength, the threat that automated AI agents or new channels bypass the interface altogether poses a long-term risk to maintaining user engagement and sustainable revenue growth.

Valuation

• The assumed bullish price target for Cars.com is $25.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cars.com's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $791.4 million, earnings will come to $81.3 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $11.77, the bullish analyst price target of $25.0 is 52.9% 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.