What happened
CarGurus (CARG 1.46%) investors trounced the market on Wednesday. The online auto-selling platform's shares were up 17% by 3 p.m. ET, compared to a flat performance for the S&P 500 index. The boost added to a good 2023 for owners of the stock, which is up 37% so far this year. Yet shares remain in negative territory over the past full year, down 36%.
The Wednesday rally was driven by an earnings report that showed improving profitability trends despite weak demand.
So what
CarGurus revealed before the market opened that sales in the first-quarter period fell 46% to $232 million. Pressures on the business included soaring growth a year ago and rising interest rate pressures on car sales. Still, CarGurus' Q1 revenue met management's forecast from late February.
Executives highlighted improvements in profitability trends, with non-GAAP operating income rising compared to the prior quarter. Free cash flow worsened but remained in solidly positive territory. Management said in a press release that these wins are signs that they are building a "sustainable business that produces a path to profitability."
But the main reason for the stock's bounce was management's brightening short-term growth outlook.
Now what
Executives predicted that Q2 sales would land between $220 million and $240 million. That result would represent a roughly 50% decline compared to soaring demand a year earlier and assumes continued pressures in transaction levels. But Wall Street pros had been bracing for an even sharper drop.
CarGurus is predicting stable profitability, too, which might put the company in a great position to expand earnings once the current cyclical downturn passes.
Still, most investors won't find many reasons to get excited about a business currently contracting at a nearly 50% pace. It is good news that CarGurus can maintain profitability in this tough selling environment, but the stock isn't likely to drive toward new highs until the growth picture improves.
