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What: Shares of TrueCar (NASDAQ:TRUE), which provides a platform aimed at making the car buying process easier and more transparent, sank on Thursday after an analyst from B. Riley rated the stock a sell. The stock was down as much as 11% earlier in the day and by 3 p.m. was down around 7% from the previous close.
So what: TrueCar provides car buyers with a way to see what other people paid for cars in their area. The company partners with car dealers across the country, sending buyers to those dealers and collecting a fee for every sale.
B. Riley gave the stock a $10 price target, well below the current stock price of around $15.50. The analyst is concerned that TrueCar has reached peak dealer penetration, leading to a slowdown in TrueCar's core business. TrueCar currently partners with around 8,500 dealers.
Now what: TrueCar isn't profitable, spending heavily on sales and marketing, and B. Riley believes that competitive pressures will continue to force the company to spend heavily. During the fourth quarter, revenue per dealer declined sequentially, and it rose only 10% year-over-year, far slower than in the past.
If B. Riley is right about dealer penetration peaking, TrueCar will need to rapidly grow its number of sales per dealer in order to maintain its growth rate. With revenue per dealer slowing, B. Riley's assessment of the challenges facing the company appears spot-on, and with the stock trading at around six times sales, TrueCar looks like a risky bet.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends TrueCar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.