Like other e-commerce stocks, CarParts.com (PRTS 1.28%) was a big winner during the pandemic's height.

The little-known auto parts stock surged as revenue skyrocketed, benefiting from the twin tailwinds of e-commerce and spending on discretionary auto upgrades or repairs as the pandemic gave Americans free time and a reason to invest in their cars.

More recently, however, CarParts.com's growth has slowed and the stock has given up its pandemic-era gains. It's now trading down 77% from its peak in early 2021. Has the marekt gone to far and is it time to consider buying the dip on this auto parts retailer? Let's take a look.

Underwhelming results

CarParts.com's revenue growth continued to decelerate in its second-quarter earnings report, growing just 0.4%, or 12% on a two-year stack, to $177 million. That topped estimates of $175.8 million.

The company cited macro-level challenges for the slow growth, saying some of its customers were trading down to cheaper products and delaying purchases of non-discretionary items. 

Gross margin fell 90 basis points to 34.2% due to higher outbound transportation costs and product mix, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell from $8.3 million to $6.3 million. On the bottom line, it reported a generally accepted accounting principles (GAAP) loss of $0.01, down from a per-share profit of $0.07 in the quarter a year ago, and below estimates at breakeven.

Car engine parts.

Image source: Getty Images.

CarParts.com vs. the competition

CarParts.com isn't the only online auto parts retailer struggling these days.   

Early in the year, Auto Plus, a subsidiary of Icahn Enterprises (IEP 0.84%) filed for Chapter 11 bankruptcy. AutoAnything said it was going out of business, and PartsID's business has collapsed with revenue down 83% to $16.2 million. 

Those challenges at its competitors all potentially give CarParts.com an opportunity to pick up market share, but the major auto parts chains may be beating it to the punch.

O'Reilly Automotive (ORLY -0.06%), for example, posted a robust comparable store sales growth of 9% in the second quarter. AutoZone and Genuine Parts Company also posted more modest comparable sales growth. On the other hand, Advance Auto Parts was forced to slash its dividend due to falling profits. 

However, CarParts.com competes more directly against other options in the e-commerce channel, and its brick-and-mortar peers didn't see the same spike in revenue during the pandemic's height.

New growth opportunities

CarParts.com expects a modest recovery in revenue growth in the second half of the year. It's forecasting top-line growth of 3% to 5%, implying a range of 3% to 7% for the second half, though management said it expected the macro environment to remain challenging in the second half of the year. 

However, the company is also making investments that are paving the way for its next leg of growth. It just launched a mobile app on both iOS and Android, giving it an opportunity to more directly capture and monetize its customer relationships. The company currently gets most of its traffic from the mobile channel, but relies on paid and organic search from sources like Google, rather than direct traffic.

Having customers download its mobile app, however, would help it reduce marketing costs, and give it a direct communication channel to customers where it can offer discounts and promotions, or potentially loyalty rewards. CEO David Meniane said the company would likely provide data on downloads and other usage metrics later in the year. He also said the company was planning a brand advertising campaign later this year that should help drive adoption of the app.

Separately, the company said it continues to make progress with its new do-it-for-me (DIFM) program, which allows customers to bring CarParts.com parts to partnered mechanics, who do the labor for them. The "Get It Installed" service is still in a "test-and-learn" phase, but management said that the Net Promoter Score for the service has doubled, showing that the experience is improving.

Is CarParts.com a buy?

Given the company's forecast for the rest of the year and the expected sluggishness in consumer demand, investors should temper their expectations for a recovery this year. 

However, the mobile app and the DIFM program both show promising signs, and the auto parts sector should benefit from a gradual shift to e-commerce just as much of the rest of the retail sector has experienced. Additionally, CarParts.com stock trades at a reasonable valuation of just 12 times adjusted EBITDA. 

While 2023 may be a challenging year, CarParts.com still looks like a good bet for long-term outperformance.