Even with its recent run-up, the S&P 500 is still down about 4% on the year. Many well-known stocks are down even more. Considering this as a backdrop, it might come as a pleasant surprise that there's a stock I'd guess most investors haven't heard of that is currently up more than 20% year to date.
While it may not be the first company that comes to mind in the world of buying and selling cars, CarGurus (CARG -1.32%) is quietly putting up impressive results even as it transforms its business model to broaden its reach. Let's take a look at what's fueling this growth.
An online marketplace
CarGurus' core business is its online platform for buying and selling vehicles. It serves customers who are car shopping by listing the inventories of the automotive dealers that are on the platform. Dealers can list their inventories for free and get very basic features, or pay for one of several subscriptions that provide varying levels of customer information and access.
For example, a free listing keeps email connections with shoppers anonymous and provides the dealers access to only some of the tools on the website. However, a paid subscription provides contact information that is not anonymous and allows customers to see links to the dealer's website and directions to the dealership.
Shoppers are able to see vehicle inventory from many local dealers and have access to proprietary features on the CarGurus platform. Shoppers can get a Deal Rating, which rates each vehicle's listed price in comparison to other, similar vehicles on the site. It's also easy for customers to see how long a vehicle has been listed, as well as its price history.
The way management sees it, the dealers and consumers each contribute to a network effect that drives revenues for CarGurus. Dealers get a high return on investment for their subscription as they get customer leads, and the shoppers are able to get the best deal on the car they're seeking. This leads to more customers coming to the site and more dealers listing their inventories.
In early 2021, CarGurus acquired a majority interest in CarOffer, an automotive inventory transaction platform. Essentially, it allows dealers to buy, sell, and trade with one another online, rather than at a traditional in-person auction.
CarOffer is available to all CarGurus dealers, whether they list their inventory for free or pay a subscription. In addition to this value-add for the dealers, the CarOffer acquisition allowed CarGurus to offer a new Instant Max Cash Offer (IMCO) to customers who want to sell their car while purchasing a new one. Rather than the traditional trade-in, shoppers can use the IMCO to find the most competitive offer for their trade-in.
The addition of the CarOffer platform provided a boost to CarGurus' already strong marketplace results. In its recently reported FY 2021 results, CarGurus posted total revenue of $951 million, a 73% increase over FY 2020. The addition of a new business with more costs did have a negative impact on gross margin, which fell to 69% in 2021, compared to 92% in the year prior.
It's worth noting that while that's a big drop, a gross margin that approaches 70% is still very strong. By comparison, competitor Carvana posted a gross margin of 15% in 2021.
Even more impressive is that in a year with an acquisition and introduction of a new business, CarGurus was able to keep expenses under control and improve its operating income by 52% and grow its net income by 41%. The balance sheet is also rock-solid, with $322 million in cash, cash equivalents, and short-term investments, and no debt.
Management is guiding for Q1 revenue of $400 million at the midpoint, which would be a year-over-year increase of 133%. One could expect to pay quite a premium for a company projecting triple-digit revenue growth, and while CarGurus isn't the cheapest it's ever been, its price-to-sales multiple of 5.5 is only about 14% higher than it was one year ago. Considering the expected continuation of its market-beating results, I think its valuation is warranted.