AccuTrade's Partnerships With Maserati And BMW Will Boost Dealer Adoption And Platform Growth

Key Takeaways

• Expansion of AccuTrade and DealerClub integration aims to boost dealer adoption, enhance earnings, and drive significant revenue growth through improved inventory management and increased platform usage.
  
• Strong consumer engagement and strategic platform enhancements are expected to improve dealer retention, ARPD, and strengthen marketplace leadership for sustained revenue growth.
  
• Dealer revenue decline and integration costs might burden margins, while optimism around AccuTrade and AI solutions faces potential adoption hurdles and competitive pressures.

Catalysts

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

• Expansion of AccuTrade's endorsement by eight new OEMs, including Maserati and BMW, which is expected to boost dealer adoption and increase the number of franchise dealers using the platform. This could contribute to higher revenue growth as AccuTrade's sales cycles begin to convert into larger dealer volumes in the second quarter.
  
• Acquisition of DealerClub, a reputation-based dealer-to-dealer wholesale marketplace, which is expected to integrate seamlessly with AccuTrade to create a $100 million-plus transactional revenue stream by directing inventory management more efficiently. This integration is projected to enhance earnings through increased platform usage and cross-sell potential.
  
• Continued strong consumer engagement on Cars.com, with over 23 million users driving 143 million visits in Q4, reinforcing the company's marketplace leadership and providing a robust foundation for future revenue growth. Enhancements in attribution and packaging could improve dealer retention and ARPD, positively impacting net margins.
  
• Planned enhancements and repackaging of Cars.com's marketplace and dealer website platforms, including tier upgrades and improved feature offerings which are intended to align pricing more closely with value delivery. This strategic repackaging is anticipated to drive ARPD growth, fueling revenue improvements.
  
• The introduction of new sales leadership with a focus on accelerating revenue growth through increased sales velocity, enhanced go-to-market strategies, and cross-selling of existing and new products. This is expected to strengthen revenue and operating margins as Cars.com leverages its platform to drive organic growth.

Cars.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cars.com's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $79.0 million (and earnings per share of $1.23) by about March 2028, up from $48.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $103.5 million in earnings, and the most bearish expecting $61.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 14.9x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 19.2x.
• Analysts expect the number of shares outstanding to decline by 3.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

Cars.com Future Earnings Per Share Growth

Risks

• Cars.com has experienced some pressure on dealer revenue, with a slight year-over-year decline noted in the fourth quarter. This pressure could impact future revenue growth if not addressed effectively.
  
• Dealer retention and growth could face challenges, as reflected in the slight decrease in dealer count in the fourth quarter and the noted impact of seasonally slower dealer spending. This could impact overall revenue and ARPD.
  
• The company’s guidance includes factors like dealer revenue expectations based on a down year-over-year fourth quarter exit rate and significant repackaging work slated for midyear, suggesting uncertainty in hitting revenue targets consistently, especially in the early part of the year.
  
• The initial phases of integrating DealerClub come with expense burdens, which are expected to suppress margins in the early part of 2025. Delays or higher-than-expected integration costs could further dent net margins.
  
• While there is optimism regarding OEM endorsements and the potential for growth in AccuTrade and AI solutions, these could also face adoption hurdles or competitive pressures, which might limit the anticipated rise in earnings or market share.

Valuation

• The analysts have a consensus price target of $18.571 for Cars.com 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 $25.0, and the most bearish reporting a price target of just $13.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $801.9 million, earnings will come to $79.0 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 8.9%.
• Given the current share price of $11.27, the analyst price target of $18.57 is 39.3% 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.