Buy Rating on CarGurus Backed by Promising CG Buy Online Platform and High-Margin Revenue Model

Marvin Fong, an analyst from BTIG, reiterated the Buy rating on CarGurus (CARG – Research Report). The associated price target is $28.00.

Marvin Fong has given his Buy rating due to a combination of factors, one of which is CarGurus’s recent introduction of CG Buy Online. This service, although still in its pilot phase, represents a significant enhancement to CarGurus’s product suite. By essentially wrapping dealers’ inventories in a fully online, end-to-end transaction platform operated by CarGurus, CG Buy Online mirrors the purchase process of the industry leader, Carvana, but without requiring consumers to visit dealers’ websites. This accessibility could expand dealers’ reach beyond their typical market areas and increase CarGurus’s transaction volume. The new platform could potentially tap into a sizable total addressable market estimated at 1.1 million used cars, aligning with a cautious yet optimistic outlook for the service’s growth and revenue contribution.

Moreover, the financials underpinning CG Buy Online are promising, with a revenue model based on mandatory fees and commissions from added services, which could net CarGurus an estimated $1,300 in fee revenue per sale, boasting a high EBITDA margin of approximately 58%. This financial performance, when scaled, could significantly enhance CarGurus’s profitability. Fong’s valuation also incorporates a conservative estimate of the total addressable market, filtering for fully-online transactions, geographical reach, and vehicle value, resulting in a substantial revenue opportunity with high margins. The expectation of capturing a portion of this market justifies a Buy rating, as it could meaningfully contribute to the company’s bottom line and shareholder value.

CARG’s price has also changed moderately for the past six months – from $17.250 to $23.180, which is a 34.38% increase.

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CarGurus (CARG) Company Description:

Cargurus, Inc. engages in the provision of online auto shopping. It offers proprietary technology, search algorithms, and innovative data analytics to analyze new and used car listings. The firm operates through the following segments: United States and International. The United States segment derives revenues from marketplace subscriptions, advertising services, and other revenues from customers within the United States. The International segment includes the revenues from marketplace subscriptions, advertising services, and other revenues from customers outside of the United States. The company was founded by Langley Steinert in 2006 and is headquartered in Cambridge, MA.