Ride-sharing Trends And OEM Shifts Will Undermine Future Revenues

Key Takeaways

• Shifting industry dynamics and evolving business models are reducing Cars.com's relevance, leading to lower user engagement and undermining future growth prospects.
  
• Heightened competition and regulatory compliance are raising costs, putting sustained pressure on Cars.com's profitability and operational margins.
  
• Rapid dealer growth, AI-driven product adoption, and expanding digital solutions are fueling revenue gains, market differentiation, recurring profits, and long-term margin resilience.

Catalysts

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

• As ride-sharing expands and urban consumers shift away from personal vehicle ownership, the volume of used car transactions is expected to structurally decline, directly reducing Cars.com's traffic and eroding long-term revenue growth potential.
  
• Growth in electric vehicle adoption is increasing automaker control over sales channels, with more OEMs likely to bypass third-party marketplaces such as Cars.com, which would weaken Cars.com's relevance and could significantly lower future marketplace and media revenues.
  
• Intensifying competition from larger, better-capitalized platforms and new digital entrants threatens Cars.com's market share, which will likely require elevated marketing and technology spend to defend its position, squeezing net margins over time.
  
• The continuing rise in regulatory scrutiny on consumer data privacy and usage is expected to lead to materially higher compliance costs, increasing Cars.com's operating expenses and posing a long-term threat to both EBITDA margins and earnings stability.
  
• Disintermediation by dealer groups and direct-to-consumer online sales models is diminishing the value provided by intermediary platforms, potentially causing persistent declines in both user engagement and transaction volume, negatively impacting Cars.com's future revenue and profit trajectory.

Cars.com Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cars.com compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cars.com's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.7% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach $31.1 million (and earnings per share of $0.49) by about August 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, up from 18.6x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.5x.
• 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 9.77%, as per the Simply Wall St company report.

Cars.com Future Earnings Per Share Growth

Risks

• The company is experiencing strong momentum in dealer count growth and product adoption, with the second quarter delivering the best sequential organic dealer additions in over three years, which is likely to support higher revenue and future earnings as the dealer base expands and season ongoing initiatives.
  
• Investments in AI-powered consumer features, analytics, and platform integration are rapidly differentiating Cars.com in the market, evidenced by user engagement metrics such as lead submission rates that are twice as high for AI search users, setting the stage for higher lead conversion and potential ARPD expansion in subsequent quarters.
  
• OEM and national revenue grew 5% year-over-year even amid tariff and macroeconomic uncertainty, and management anticipates OEM growth as an ongoing tailwind, which will drive incremental top line growth and margin strength as the market stabilizes.
  
• Expanding offerings in digital dealer solutions, such as AccuTrade and DealerClub, are growing quickly, with dealer adoption and transaction volumes rising at a double-digit pace; these innovations support recurring revenue streams and drive higher profit margins as Cars.com disrupts legacy auction markets and increases cross-sell opportunities.
  
• The company is generating strong free cash flow and is executing substantial share repurchases, with plans to return $70 million to $90 million to shareholders this year; combined with prudent cost discipline and adjusted EBITDA margin guidance of 29 to 31 percent, these factors indicate resilience in net margins and the potential for long-term earnings growth.

Valuation

• The assumed bearish price target for Cars.com is $11.0, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $774.4 million, earnings will come to $31.1 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $12.43, the bearish analyst price target of $11.0 is 13.0% lower.
  
• 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.