Harnessing Digital Innovation And Calculated Expansion To Drive Revenue And Profitability Growth

Key Takeaways

• AccuTrade's operation-centricity and direct inventory acquisition from customers enhance profitability, potentially increasing Cars.com's revenue and net margins.
  
• Digital solutions and technological investments boost dealer engagement, operational efficiency, ARPD, and revenue growth, benefiting Cars.com's earnings and shareholder value.
  
• Revenue stability may be pressured by dealer customer declines and macroeconomic trends, despite strong growth in OEM and National revenue and increased operating expenses.

Catalysts

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

• AccuTrade's positioning at the center of dealership operations and its ability to help dealers acquire inventory directly from customers is enhancing profitability, potentially increasing revenue and net margins for Cars.com.
  
• Significant adoption of digital website experiences and media solutions, including VIN Performance Media, can lead to improved dealer inventory turn rates and incremental revenue, thereby boosting Cars.com's earnings.
  
• The expansion of marketplace dealers and high levels of consumer engagement and lead conversion on Cars.com can drive sustained growth in dealer revenue and improve ARPD (Average Revenue Per Dealer).
  
• Strong OEM revenue growth and increased spending from OEM partners, driven by Cars.com's consumer reach and product solutions like New Car Hub, are expected to positively impact overall revenue and profitability.
  
• Planned technological investments, cost discipline, and strategic partnerships to enhance the platform's effectiveness are set to improve operational efficiency, margin expansion, and shareholder value through increased free cash flow and potential share repurchases.

Cars.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cars.com's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $87.4 million (and earnings per share of $1.3) by about November 2027, up from $39.2 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 21.2x on those 2027 earnings, down from 30.5x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 23.7x.
• Analysts expect the number of shares outstanding to grow by 1.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Cars.com Future Earnings Per Share Growth

Risks

• The decline in dealer customers, down 135 dealers quarter-over-quarter, coupled with the challenge of rebuilding sales momentum, particularly after the CDK disruptions, indicates potential pressure on revenue and customer retention.
  
• The description of an operating environment with macro trends putting pressure on dealer profitability and budgets suggests that continued financial strain on dealers could lead to decreased spending on Cars.com services, impacting revenue stability.
  
• The OEM and National revenue, while showing strong growth this quarter, is subject to lumpiness due to being tied to new model launches and special incentives. This variability can lead to unpredictable swings in earnings quarter to quarter.
  
• Despite strong October growth, the acknowledgment of profit normalization affecting dealer funding trends implies a risk of reduced dealer revenues if market conditions result in sustained lower profitability margins for these businesses.
  
• Rising operating expenses, up 5% year-over-year, including increased costs for product and technology investments, can erode net margins if not matched by proportional revenue growth, impacting overall earnings sustainability.

Valuation

• The analysts have a consensus price target of $22.0 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 $26.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $811.3 million, earnings will come to $87.4 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of $18.5, the analyst's price target of $22.0 is 15.9% 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.