TrueCar Inc Stock Sinks After Q4 Results. Are Investors Overreacting?

Investors are selling TrueCar after the fourth-quarter results hit the news feeds, but I believe it's an overreaction. Here's why.

Daniel Miller
Daniel Miller
Feb 20, 2015 at 11:29AM
Technology and Telecom

Sometimes Wall Street gets it right, and sometimes it gets it wrong. It has become clear today that the market is disappointed with TrueCar's (NASDAQ:TRUE) fourth-quarter results. The stock was down more than 13% as of 11:25 a.m. I'd argue, though, the stock's post-earnings plunge is a case of not seeing the forest for the trees.

Certainly there were a couple of oddities in the results, but when put in context the sell-off seems like an overreaction. Let's dig in.

By the numbers
Overall, the online vehicle marketplace reported quarterly revenue in line with expectations and beat Wall Street's estimate by a penny on the bottom line. Revenue was up 38% over 2013's fourth quarter, to $55.5 million. Unit sales, which are generated when a dealership completes a sale from a TrueCar lead, climbed 43% year over year in the fourth quarter, to 163,000. 

TrueCar's net loss widened from a $7.6 million loss in the fourth quarter of 2013 to a $9.8 million loss in the most recent quarter. However, TrueCar's fourth-quarter adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization, checked in at $4.3 million, an improvement over negative $0.3 million for the fourth quarter of 2013.

Chart by author. Information source: TrueCar's fourth-quarter presentation. 

While adjusted EBITDA is trending the way investors would like, the chart that has investors skittish this morning, in my opinion, is this one:

Chart by author. Information source: TrueCar.

Investors are likely concerned that the decline in unique visitors and units sold is the beginning of a new trend, which is unlikely. This being anything more than a speed bump would certainly be cause for concern, as car buyers' using TrueCar is essential to its network effect, and thus its ability to generate revenue from dealerships completing transactions with TrueCar sales leads.

The trend for TrueCar's unique visitors and units sold has been strong since 2012, and the sequential decline in both metrics raised a red flag for some investors. However, TrueCar is subject to the cyclical and seasonal automotive industry, which typically has very strong new-car sales in the second and third quarters, followed by weaker sales in the fourth and first quarters. You can see the same weakness between 2013's third and fourth quarters.

As someone who covers the ins and outs of the entire automotive industry, I believe it is best to use year-over-year comparisons to judge growth. And in comparing year-over-year results, you can see TrueCar's units sold increased more than its unique visitors, suggesting the company is improving the efficiency of its business model -- which isn't surprising considering management recently mentioned it was working with dealers to improve sale completion rates.

Speaking of using year-over-year comparisons, when looking at metrics in that light, TrueCar posted excellent fourth-quarter and full-year results.

Charts by author. Information source: TrueCar.

Ultimately, TrueCar investors who are selling today are living in the moment, and that's not typically a recipe for success in the stock market. Long-term investors understand this company is in the very early innings of its enormous growth potential. TrueCar's business is extremely scalable, and as the company pushes its adjusted EBITDA margin from 8% in the fourth quarter to its long-term goal of 35%, patient investors will be rewarded.

Sure, the sequential decline in unique visitors and units sold raised a red flag for some investors, but long-term investors can expect 2015 to be stronger than last year. Investors should take swings in the company's performance with a grain of salt given the automotive industry's seasonality.