What happened

Shares of Cars.com (CARS 1.87%) are up 11.5% from where they closed last Friday after the online auto marketplace posted fourth-quarter earnings that beat Wall Street estimates on the top and bottom lines, according to data from S&P Global Market Intelligence.

Revenue for the period was $168.2 million, up 6% from a year ago, beating estimates of $166.2 million, while net income of $10.3 million, or $0.15 per share, reversed a year-ago net loss of $2.9 million, or $0.04 per share, and handily outpaced analyst forecasts of just $0.06 per share.

smiling couple in car holding keys.

Image source: Getty images.

So what

The automotive market has been a difficult one to navigate as lingering pandemic-era congestion has caused supply chain issues that have created a shortage of both new and used vehicles. That led to a situation where average prices hit all-time records.

New car prices were at an average of $49,507 in December while used cars were trading at an average of $29,533, a 5% drop from the record high of $31,095 reached last April.

While that has made it a difficult environment for new and used car dealers like Carvana to sell vehicles, it likely created a perfect opportunity for an auto trading marketplace such as Cars.com to thrive.

Used car owners, seeing how high prices were, understandably would want to maximize their chance of getting the most money for their cars. Private-party transactions tend to offer better prices for sellers than trading it in at a dealer. 

While Cars.com also has dealers selling cars on its site, it reported average monthly visitors to its site rose 5% in the fourth quarter to 24.6 million unique visitors. Dealer customers were slightly lower in December at 19,506 from the 19,585 that it had in September, but it was up by 327 customers versus the year-ago period.

Now what

CEO Alex Vetter said in a statement, "2022 marked a strong year of growth for our business as we helped consumers, dealers, [original equipment manufacturers], and lenders in an environment that challenged many."

That's becoming more attractive to Wall Street analysts, with several raising their price targets on Cars.com in the aftermath of its earnings report.

Analysts forecast the auto marketplace will grow profits 20% annually for the next five years, and though the stock is pricey at 36 times those estimates, at 13 times the free cash flow it produces, Cars.com stock doesn't seem overvalued at around $20 per share.