CarGurus (CARG) a 2017 IPO winner

Since 1968, I have purchased to date only 7 vehicles, all new. 3 of these were purchased via my friend, an auto broker, who each time found the car with my specifications at a huge discounted price and delivered it to my residence, or, in one instance, for pick up at a German manufacturing plant. Each time he strongly recommended that I should buy from his list of late model used cars with huge discounted prices (e.g., repossessed vehicles that lenders wanted to get rid of ASAP). After he relocated to another state, I used buying services (AAA, Costco) to buy my last 3 new vehicles. I have never bought a used car. After attending last year’s Los Angeles Auto Show in November, I considered buying a new Toyota Tacoma truck, but my current auto mechanic friend, who owns and operates a busy shop after working years for Toyota dealerships, strongly advised me to look for a used late model that he would completely inspect prior to purchase. So where to look. Another friend invited me to tag along to his preferred auctions (repos and government seized vehicles) where he has bought all of his late model vehicles (e.g., 2016 Lexus); he hauls his mechanic friend to the auction sites to thoroughly inspect vehicle candidates. TV commercials and searching the web lead me to CarGurus, among others, where I discovered how drastically the vehicle resale market has changed. After conducting my due diligence, I decided to invest in CarGurus (CARG).

CarGurus went public on 10/12/2017, pricing its shares at $16 ahead of the IPO. CARG opened at $29 in its market debut and started trading at a premium, up a whopping 81%! Since its IPO, the CarGurus stock price has realized a substantial 95.6% gain to date 9/24/18 at $53.94/share and hitting an all-time high of $56.17 on 8/8/2018. This recent explosive growth in stock price, in turn, has caused soaring increases in EV/EBITDA and EV/S, the metrics that I watch and weigh among other key financial and growth indicators in the big picture.

Subsequently, after reading Saul’s latest criteria in his 7/12/2018 post “How I Pick a Company to Invest in” [ https://discussion.fool.com/how-i-pick-a-company-to-invest-in-33… ], I found CARG satisfies most of Saul’s criteria as follows, and I, thereafter, decided to bring CARG to the attention of this board.

• An Information Technology sector company in the Internet Software & Services industry that is number 1 in its sector, substantially ahead of any competition;

• Rapid revenue growth at least 35% and higher AND, my preferred criterion, operating in the black with increasing earnings;

• Recurrent revenue and high gross margins, generated by marketplace subscription revenue from dealers through Listing and Dealer Display subscriptions and advertising revenue from auto manufacturers and other auto-related brand advertisers;

• Rapidly improving metrics, i.e., strong gross, operating and profit margins; strong growing FCF;

• Rock solid capital structure with zero long-term debt.

So here goes a long post.

COMPANY PROFILE

From the CarGurus 10K FY 2017 Annual Report and latest quarter report with my emphasis in bold:

“CarGurus is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using proprietary technology, search algorithms, and innovative data analytics, we believe we are building the world’s most trusted and transparent automotive marketplace and creating a differentiated automotive search experience for consumers. Our trusted marketplace empowers users with unbiased third-party validation on pricing and dealer reputation as well as other information that aids them in finding “Great Deals from Top-Rated Dealers.” Our selection of car listings provides the largest number of car listings available on any of the major U.S. online automotive marketplaces. In addition to the United States, we operate online marketplaces in Canada, the United Kingdom, and Germany.

A core principle of our marketplace is transparency. For consumers considering used vehicles, we aggregate vehicle inventory from dealers and apply our proprietary analysis to generate a Deal Rating as one of: Great Deal, Good Deal, Fair Deal, High Priced, or Overpriced. Deal Rating illustrates how competitive a listing is compared to similar cars sold in the same region in recent history. We determine Deal Rating principally on the basis of both our proprietary Instant Market Value, or IMV, algorithm, which determines the market value of any given vehicle in a local market, and Dealer Rating, a measure of a dealer’s reputation as determined by reviews of that dealer from our user community. By sorting organic search results based on a used car’s Deal Rating, we enable consumers to find the most relevant car for their needs. For new cars, we help our users understand deal quality by providing price analysis and our Dealer Rating. We also provide our users information historically not widely available, such as Price History, Time on Site, and Vehicle History. We believe this approach brings greater transparency, trust, and efficiency to a consumer’s car research and buying process, leading to higher engagement and a more informed consumer who is better prepared to purchase at the dealership.

Our large, engaged, and predominantly mobile user base presents an attractive audience of in-market consumers for our dealers. By connecting dealers with more informed consumers, we believe we provide dealers with an efficient customer acquisition channel and attractive returns on their marketing spend with us. Dealers can list their inventory in our marketplace for free with our Basic Listing product or with a paid subscription to our Enhanced and Featured Listing products. Dealers with our Basic Listing product receive anonymized email connections and access to a subset of the tools on our Dealer Dashboard at no cost. Dealers with a paid subscription receive connections to consumers that are not anonymous and can be made through a wider variety of methods, including phone calls, email, managed text and chat, links to the dealer’s website, and map directions to dealerships. In addition, dealers with our Enhanced and Featured Listing products are able to display their dealer name, address, and dealership information on their listings to gain brand recognition, which promotes walk-in traffic to the dealer. We also provide paying dealers with full access to our Dealer Dashboard, including inventory pricing tools informed by real-time market conditions, which helps them more effectively price, merchandise, and sell their cars. Our success with dealers is evidenced by the 23% and 66% growth in the number of paying dealers in our U.S. marketplace in 2017 compared to 2016 and in 2016 compared to 2015, respectively.

Our scaled online marketplace model drives powerful network effects. The industry-leading inventory selection offered by our dealers attracts a large and engaged consumer audience. The value of robust connections to this audience incentivizes dealers to purchase our Enhanced or Featured Listing products. Having more paying dealers provides consumers with more dealer information and methods to contact them. More consumers and connections drive greater value to paying dealers on our platform. Driven by these network effects, we continue to amass more data, which we use to continuously improve our search algorithms, the accuracy of Deal Ratings, our user experience, and, ultimately, the quality of the connections between consumers and dealers.

We generate marketplace subscription revenue from dealers through Listing and Dealer Display subscriptions and advertising revenue from auto manufacturers and other auto-related brand advertisers. Our rapid revenue growth and financial performance over the last several years exemplifies the strength of our marketplace. We generated revenue of $316.9 million in 2017, $198.1 million in 2016, and $98.6 million in 2015, representing year-over- year increases of 60% in 2017 and 101% in 2016. In 2017, we generated net income of $13.2 million and our Adjusted EBITDA was $24.1 million, compared to net income of $6.5 million and Adjusted EBITDA of $11.0 million in 2016 and a net loss of $1.6 million and Adjusted EBITDA of $(0.4) million in 2015. See “Selected Consolidated Financial Data — Adjusted EBITDA” for more information regarding our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our net income (loss).

Dealer Marketplace
Our marketplace connects dealers to a large audience of informed and engaged consumers. We offer three types of marketplace Listing products to dealers: Basic Listing, which is free, and Enhanced or Featured Listing, each of which requires a paid subscription. We price our Enhanced and Featured Listing products as a monthly, quarterly, semiannual, or annual subscription based on the dealer’s inventory size, region, and our assessment of the return on investment, or ROI, our solution will provide them.

Basic Listing. Basic Listing allows non-paying dealers to list their inventory in our marketplace anonymously. Consumers can contact these dealers only through an anonymous, CarGurus-branded email address so the dealer does not receive any of the consumer’s personal contact information from our platform. We do not display the name, address, website URL, or phone number of any non-paying dealers on our website.

Enhanced Listing. Enhanced Listing provides dealers with a higher volume and quality of connections to consumers. Dealers that subscribe to Enhanced Listing gain the opportunity to connect with consumers directly through email, phone, and managed text and chat. Our platform allows paying dealers to provide a link to their website, dealership information such as name, address, and hours of operation, and map directions to their dealership on VDPs, helping consumers easily contact or visit them, which we believe results in increased local brand awareness and walk-in traffic.

Featured Listing. A dealer that pays the premium subscription rate for our Featured Listing product receives all of the benefits of the Enhanced Listing product, as well as promotion of their Great Deal, Good Deal, and Fair Deal inventory in a clearly labeled section at the top of the search results page. This premium placement for Featured listings generates increased connection volume relative to Enhanced Listing.

Dealer Dashboard
Basic, Enhanced, and Featured Listing dealers all have access to the following Dealer Dashboard features and tools:
• Performance Summary. Provides dealers with real-time and historical data concerning the connections and consumer exposure they have received in our marketplace. This enables dealers to analyze connections and SRP and VDP views at a granular level to inform the dealer’s sales and merchandising efforts.
• Dealer Insights. Provides pricing analysis of the dealer’s inventory, as well as a summary of a vehicle’s missing information such as price, photos, or trim. This data helps dealers better merchandise their vehicles.
• User Review Management. Allows dealers to track and manage their dealership reviews from our users. Dealers can respond to users, report potentially fraudulent reviews, and publish positive reviews to social media platforms for broader exposure.
Enhanced and Featured Listing dealers also have access to the following additional features and tools:
• Pricing Tool. Helps dealers evaluate the impact of pricing changes for each used vehicle in their inventory and the resulting impact on the car’s Deal Rating, empowering dealers to make informed pricing decisions based on market data in their local area.
• Market Analysis. Informs dealers of local market trends in used cars, such as the most searched makes and models in their local market. This information helps dealers align with local consumer preferences and inform strategies for increasing inventory turnover and vehicle acquisition.

Dealer Advertising and Customer Acquisition Products
In addition to listing cars in our marketplace through our Listing products, we also provide all dealers with a web widget that allows them to place Deal Rating Badges, which show our Deal Rating for cars that have been rated as a Great Deal, Good Deal, or Fair Deal, on their own website. Our Deal Rating serves as trusted, third-party validation on their website.
We offer Enhanced and Featured Listing dealers the following additional advertising and customer acquisition products:
• Dealer Display. Dealers are able to buy display advertising that appears in our marketplace and on other sites on the internet to build brand awareness. Advertisements can be targeted by geography, search history, and a number of other targeting factors, allowing dealers to increase their visibility with relevant consumers and drive consumers to the dealer’s own website.
Dealer Search Engine Marketing and Social Media Advertising. Leveraging the capabilities we have developed for our own algorithmic traffic acquisition, we offer a product that delivers search engine marketing, or SEM, and social media advertising to programmatically drive qualified traffic to dealer websites. Utilizing algorithmic bidding strategies and automated keyword list management, we help dealers to optimize traffic acquisition.

CARG KEY BUSINESS METRICS

We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. We believe it is important to evaluate these metrics for the United States and International segments. International is defined as all non-U.S. markets in which we operate. International markets will likely perform differently from the U.S. market due to a variety of factors, including our operating history in the market, our rate of investment, market size, market maturity, and other dynamics unique to each country.

Monthly Unique Users
We define a monthly unique user as an individual who has visited our website within a calendar month, based on data as measured by Google Analytics. We calculate average monthly unique users as the sum of the monthly unique users in a given period, divided by the number of months in that period. We count a unique user the first time a computer or mobile device with a unique device identifier accesses our website during a calendar month. If an individual accesses our website using a different device within a given month, the first access by each such device is counted as a separate unique user. We view our average monthly unique users as a key indicator of the quality of our user experience, the effectiveness of our advertising and traffic acquisition, and the strength of our brand awareness. Measuring unique users is important to us because our marketplace subscription revenue depends, in part, on our ability to provide dealers with connections to our users and exposure to our marketplace audience. We define connections as interactions between consumers and dealers on our marketplace through phone calls, email, managed text and chat, and clicks to access the dealer’s website and map directions to the dealership.

Monthly Sessions
We define monthly sessions as the number of distinct visits to our website that take place each month within a given time frame, as measured and defined by Google Analytics. We calculate average monthly sessions as the sum of the monthly sessions in a given period, divided by the number of months in that period. A session is defined as beginning with the first page view from a device and ending at the earliest of when a user closes their browser window, after 30 minutes of inactivity, or at midnight Eastern Time each night. A session can be made up of multiple page views and visitor actions, such as performing a search, visiting vehicle detail pages, and connecting with a dealer. We believe the volume of sessions in a time period, when considered in conjunction with the number of unique users in that time period, is an indicator of consumer satisfaction and engagement with our marketplace.

Number of Paying Dealers
Paying dealers are the number of dealers subscribing to one of our Enhanced or Featured Listing products at the end of a defined period. We believe that the number of paying dealers is indicative of the value proposition of our Listing products, and our sales and marketing success, including our ability to retain paying dealers and develop new dealer relationships.

Average Annual Revenue per Subscribing Dealer (AARSD)
We measure the average annual revenue we receive from each paying dealer. We define AARSD, as measured at the end of a defined period, as the total marketplace subscription revenue during the trailing 12 months divided by the average number of paying dealers during the same trailing 12-month period. Our ability to grow the AARSD is an indicator of the value proposition of our products and the return on investment, or ROI, our paying dealers realize from our products. Increases in AARSD are driven by our ability to grow the volume of connections to our users and the quality of those connections, effectively illustrate the value of brand exposure to our engaged audience in relation to subscription cost, upsell package levels, and cross-sell additional products to our paying dealers.”

I’ve assembled all the above business metric info in the following tables for comparative analyses and performance evaluations that indicate the following:

• The number of U.S. and international paying dealers continues to grow quarterly, sequentially and year over year; the percent change YoY is trending downward, something I continue to watch and evaluate in the bigger picture.

• U.S. and international AARSD, Monthly Unique Users and Monthly Sessions are all very favorably trending upward quarterly, both sequentially and year over year.


**CARG	 U.S.	       Int’l.		Total**
**Paying Change  Paying  Change	Paying 	Change	  U.S.  Change	Int’l. Change	  Con.  Change**
**FY/QTR Dealers	 YoY  Dealers	YoY    Dealers	 YoY	 AARSD	 YoY	AARSD	 YoY	 AARSD	 YoY**
												
Q2 ‘18	26,871  15.1%	3,098	82.9%	29,969	19.7%	$13,130  18.8%  $5,037	 1.9%   $12,425	 15.5%
Q1 ‘18	26,261	18.9%	2,765  105.1%   29,026  23.9%	$12,470  16.5%	$5,045  14.6%   $11,887	 13.7%
												
FY '17	25,122	23.5%	2,548  167.6%	27,670	29.9%	$12,055	 16.1%  $4,904  28.0%		
												
Q4 ‘17	25,122	23.5%	2,548  167.6%	27,670	29.9%	$12,055	 16.1%	$4,904	28.0%		
Q3 ‘17	24,313	29.5%	2,240  257.8%	26,553	36.8%	$11,526	 16.0%	$4,711			
Q2 ‘17	23,347	37.8%	1,694  453.6%	25,041	45.2%	$11,048		$4,944		$10,759	
Q1 ‘17	22,081		1,348		23,429		$10,700		$4,401		$10,454	
												
FY '16	20,349	65.8%	  952 1,696.2%	21,301	72.8%	$10,383		$3,830			
												
Q4 ‘16	20,349		  952		21,301		$10,383		$3,830			
Q3 ‘16	18,777		  626		19,403		 $9,939		    NA			
Q2 ‘16	16,944		  306		17,250		     NA		    NA			
Q1 ‘16	    NA		   NA		    NA		     NA		    NA			
												
FY '15	12,276		   53		12,329		 $8,835		    NA			

Notes:
(a) AARSD means Average Annual Revenue per Subscribing Dealer
(b) Int’l. means International
(c) Con. means Consolidated

**U.S. 		Int’l.		Total**
 **U.S. Monthly 	     Int’l Monthly	  Total Monthly	       Monthly	       Monthly		Monthly**
 **Unique Users Change Unique Users Change  Unique Users Change Sessions Change Sessions Change Sessions  Change**
 **(millions)	YoY   (millions)    YoY	    (millions)  YoY   (millions) YoY  (millions) YoY  (millions)  YoY**
												
Q2‘18	36.046	56.1%	 3.484	   54.2%      39.530	55.9%	93.324	51.5%	7.978	63.8%	101.302	  52.8%
Q1‘18	30.797	33.4%	 3.492	   63.7%      34.289	36.0%	84.821	37.1%	8.070	68.0%	 92.891	  39.3%
												
FY'17a	24.469	21.6%	 2.451	   75.6%      26.920	25.1%	64.758	38.7%	5.365  104.2%	 70.123	  42.1%
												
Q4’17b	25.700	 2.8%	 2.800	   55.6%      28.500	27.2%	68.500	42.7%	6.100	69.4%	 74.600	  44.6%
Q3‘17	25.951	24.1%	 2.607	   55.1%      28.558	26.5%	67.359	37.7%	5.548	72.7%	 72.907	  39.9%
Q2‘17	23.089	18.3%	 2.259	  118.5%      25.358	23.4%	61.593	37.0%	4.871  165.7%	 66.298	  41.7%
Q1‘17	23.079		 2.133		      25.212		61.860		4.804		 66.664	
												
FY'16a	20.120		 1.396		      21.516		46.706		2.627		 49.333	
												
Q4’16b	20.600		 1.800		      22.400		48.000		3.600		 51.600	
Q3‘16	20.903		 1.681		      22.584		48.903		3.213		 52.116	
Q2‘16	19.510		 1.034		      20.544		44.953		1.833		 46.786	
Q1‘16	    NA		    NA		          NA		    NA		   NA		     NA	
												
FY'15a	14.986		 0.198		      15.184		31.531		0.342		 31.873	

Notes:
(a) figures as reported in the CARG 10K 2017 Annual Report.
(b) figures as reported in the CARG news release for Q4 in 2017 that do not match with 10K figures.

Competition

We face competition to attract consumers and paying dealers to our marketplace and to attract advertisers to purchase our advertising products and services. Our competitors offer various marketplaces, products, and services that compete with us. Some of these competitors include:
• major U.S. online automotive marketplaces: AutoTrader.com, Cars.com, and TrueCar.com;
• U.S. online automotive content publishers, such as Edmunds.com, KBB.com and Carfax.com;
• online automotive marketplaces and websites in international markets;
• internet search engines;
• peer to peer marketplaces; and
• sites operated by individual automobile dealers.

Competition for Consumers and Dealers
We compete for consumer visits with other online automotive marketplaces, free listing services, general search engines, and dealers’ websites. We compete for consumers primarily on the basis of the quality of the consumer experience. We believe we compete favorably on user experience due to the number of our vehicle listings, the unbiased transparency of the information we provide on cars, prices, and dealers, the intuitive nature of our user interface, and our leading mobile user experience, among other factors.
We compete for dealers’ marketing spend with offline customer acquisition channels, other online automotive marketplaces, dealers’ own customer acquisition efforts on search engines, and other internet sites that attract consumers searching for vehicles. We compete primarily on the basis of the ROI that our marketplace provides. We believe we compete favorably due to our large user audience, high user engagement, and the volume and quality of connections we provide to well-informed consumers, which results in an attractive ROI for dealers.

Competition for Advertisers
We compete for a share of advertisers’ total marketing budgets against media sites, websites dedicated to helping consumers shop for cars, major internet portals, search engines, and social media sites, among others. We also compete for a share of advertisers’ overall marketing budgets with traditional media, such as television, radio, magazines, newspapers, automotive guide publications, billboards, and other offline advertising channels. We compete for advertising spend based on the marketing ROI that our marketplace provides. We believe we compete favorably due to our large user audience size, high user engagement, and the effectiveness and relevance of our advertising products.

CORPORATE FINANCIALS

Corporate financials for CarGurus show the following:
• Continued strong growth in revenue, net income, earnings and share price;
• High quality revenue: recurring, high retention, and diversified;
• Proven operating leverage and profitability;
• Strong margins;
• Attractive free cash flow generation;
• Strong capital structure, and
• Scalable model for replication in international markets.

I highly recommend viewing the CarGurus Business Overview September 2018 at this website.
https://investors.cargurus.com/static-files/e2a1d5ce-bb22-43…

Revenue, Net Income and Earnings


**MARKET		    Non-GAAP	       Non-GAAP 	      GAAP		  GAAP**
**CAP	  REVENUE  Change  NET INCOME  Change EPS diluted  Change  NET INCOME  Change  EPS diluted  Change**
**FY/QTR	   ($)	   ($ M)    YoY	      ($ M)	YoY	  ($) 	    YoY	      ($ M)	YoY	  ($) 	     YoY**

9/24/18	 5.945 B									
Q2 ‘18	 3.570 B  110.325   44.7%     6.865	66.2%    0.06	    50.0%    31.265(a) 619.4%	  0.28	    600.0%
Q1 ‘18	 4.083 B   98.701   47.2%     6.554	58.0%	 0.06	    50.0%     3.651    (13.2%)	  0.03	    (25.0%)

**FY 2017	 3.181 B  316.861   59.9%    15.786    135.4%	 0.15		     13.199    103.2%	  0.12**	
											
Q4 ‘17	 3.181 B   90.597   49.1%     5.349	37.4%	 0.05		      2.267    (40.9%)	  0.02	
Q3 ‘17		   82.989   56.2%     2.160	(1.6%)	 0.02	     0.0%     2.379	11.3%	  0.02	
Q2 ‘17		   76.240   67.1%     4.130		 0.04		      4.346  1,515.6%	  0.04	
Q1 ‘17		   67.035   73.6%     4.147		 0.04		      4.207  1,569.4%	  0.04	
<>b>											
FY 2016		  198.141  101.0%     6.706		(0.25)		      6.497		 (0.58)	
											
Q4 ‘16		   60.764   85.5%     3.894		(0.27)		      3.838		 (0.66)	
Q3 ‘16		   53.136   96.2%     2.195		 0.02		      2.138		  0.02	
Q2 ‘16		   45.627  108.9%					      0.269			
Q1 ‘16		   38.614  128.4%					      0.252			

**FY 2015		   98.588						     (1.636)		 (0.41)**	

Q4’15		   32.757						     (0.322)		
Q3’15		   27.084						     (0.475)		
Q2’15		   21.841						     (1.317)		
Q1’15		   16.906						      0.478		

Note (a) includes $28.828 million that reflects the tax effect of differences between tax deductions related to stock compensation and the corresponding financial statement expense and is an adjustment made in the non-GAAP net income.
—————————————————

Since its IPO almost a year ago, the market cap has jumped 104.7% to $5.945 billion on 9/24/18 from $2.904 billion on 10/12/17.

Quarterly revenues continue to strongly grow sequentially and year over year. The percent change YoY is trending downward, something I watch, but am not overly concerned about at this time to reduce or bail out of my CARG investment.

Quarterly non-GAAP net income and non-GAAP earnings are favorably trending upward, both sequentially and year over year.

The following table shows the breakdown of total annual and quarterly revenue. Both marketplace subscription revenue and advertising revenue realized strong growth sequentially and year over year. The percent change YoY is trending downward for marketplace subscription revenue and upward for advertising revenue.


**CARG	  Marketplace  Change  Advertising  Change    TOTAL   Change  Total Paying  Change**
**REVENUES Subscription	YoY	 & Other     YoY     REVENUE   YoY      Dealers	     YoY**
FY/QTR	     ($M)		   ($M)		      ($M)			
								
Q2 ‘18	    97.749	44.2%	 12.576	     48.7%   110.325   44.7%	 29,969	    19.7%
Q1 ‘18	    89.286	48.4%	  9.415	     37.2%    98.701   45.8%	 29,026	    23.9%
							
FY 2017	   282.664	65.0%	 34.197	     27.4%   316.861   59.9%	 27,670	    29.9%
								
Q4 ‘17	    80.775	51.9%	  9.822	     29.6%    90.597   49.1%	 27,670	    29.9%
Q3 ‘17	    73.937	59.1%	  9.052	     35.9%    82.989   56.2%	 26,553	    36.8%
Q2 ‘17	    67.780	71.6%	  8.460	     38.1%    76.240   67.1%	 25,041	    45.2%
Q1 ‘17	    60.172	87.2%	  6.863	      6.0%    67.708   75.3%	 23,429	
							
FY 2016	   171.302     128.0%	 26.839	     14.5%   198.141  101.0%	 21,301	    72.8%
								
Q4 ‘16	    53.187     102.6%	  7.577	     16.5%    60.764   85.5%	 21,301	
Q3 ‘16	    46.477     120.5%	  6.659	     10.9%    53.136   96.2%	 19,403	
Q2 ‘16	    39.500     143.7%	  6.127	      8.8%    45.627  108.9%	 17,250	
Q1 ‘16	    32.138     177.0%	  6.476	     22.1%    38.614  128.4%	     NA	
								
FY 2015	    75.142	         23.446		      98.588		 12,329	
								
Q4 ‘15	    26.253		  6.504		      32.757			
Q3 ‘15	    21.080		  6.004		      27.084			
Q2 ‘15	    16.208		  5.633		      21.841			
Q1 ‘15	    11.601		  5.305		      16.906			

Regarding total annual revenues, the following table shows the breakdown of Recurring Marketplace Subscription Revenue, which is significantly trending upward, versus Non-recurring Revenue, which is significantly trending downward. This is a highly noteworthy trend.


**REVENUE	             RECURRING	       % of  NON-RECURRING   % of   TOTAL     % of** 
**$ MILLION   Marketplace Subscription  Total		    Total            Total**		
						
FY 2017	               $283	      89.3%	  $34	    10.7%    $317   100.0%
						
FY 2016	               $171	      86.4%	  $27	    13.6%    $198   100.0%
				    		
FY 2015	                $75	      75.8%	  $23	    23.2%     $99   100.0%

Regarding the customer mix of diversified recurring revenue for FY 2017, the following table shows that their top ten customers accounted for only 3% or $8.5 million of the total $283 million.


**CUSTOMER MIX	                           FY 2017	% of**
**DIVERSIFIDED RECURRING REVENUE	         ($ million)	TOTAL**
		
TOP TEN CUSTOMERS	                      $8.5	  3%
		
OTHER CUSTOMERS	                            $274.5	 97%
		
RECURRING Marketplace Subscription Revenue  $283.0      100%

==========================================

CORPORATE GUIDANCE


**3Q 2018 GUIDANCE	    EXPECTED	        Q3 2017	        PROJECTED GAIN**
			
Total Revenue	            $112 M to $113 M	$82.989 M	35.0% to 36.2%
			
Non-GAAP operating income   $5.5 M to $6.5 M 	$2.937 M	87.3% to 121.3%
			
Non-GAAP EPS	            $0.04 to $0.05	$0.02	        100% to 150%

**FY 2018 GUIDANCE	    EXPECTED		FY 2017         PROJECTED YoY GAIN**
			
Total Revenue	            $436 M toi $438 M	$316.661 M	37.7% to 38.3%
			
Non-GAAP operating income   $28.5 to $30.5 M	$20.302 M	40.4% to 50.2%
			
Non-GAAP EPS	            $0.22 to $0.23	$0.15	        46.7% to 53.3%

While corporate management expects a strong gain in Q3 ’18 revenue, i.e., 35% to 36.2%, their projection continues the aforementioned downward trend in the percentage of YoY change, which I repeat again is something that I watch, but am not overly concerned about at this time to reduce or bail out of my CARG investment. Their projected YoY gains for non-GAAP operating income and EPS are exceptional and noteworthy, if met or exceeded.

Margins

CarGurus has very high stable gross margins and improving positive operating and profit margins.


**MARGINS	GROSS	OPERATING   PROFIT   OPERATING   PROFIT**
**non-GAAP   non-GAAP	GAAP	  GAAP**
					
Q2 ‘18	94.6%	  6.4%	     6.2%	1.3%	  28.3%
Q1 ‘18	94.4%	  7.8%	     6.6%	4.0%	   3.7%
					
FY '17	94.4%	  6.4%	     5.0%	4.8%	   4.2%
					
Q4 ‘17	94.2%	  5.3%	     5.9%	0.1%	   2.5%
Q3 ‘17	94.3%	  3.5%	     5.4%	7.9%	   5.7%
Q1 ‘17	95.0%	  9.6%	     6.2%	9.5%	   6.3%
					
FY '16	95.2%	  4.5%	     3.4%	4.3%	   3.3%
					
Q4 ‘16	95.2%	  7.7%	     6.4%	7.6%	   6.3%
Q3 ‘16	94.6%	  6.3%	     4.1%	6.1%	   4.0%


Free Cash Flow

CarGurus maintains strong free cash flow generation.


**PERIOD	 FCF**
**QTR/FY	 ($M)**
	
Q2 ‘18	16.78
Q1 ‘18	 5.36
	
FY 2017	18.32
	
Q4 ‘17	 5.51
Q3 ‘17	 5.64
Q2 ‘17	 2.64
Q1 ‘17	
	
FY 2016	12.79
FY 2015	 5.30


Capital Structure

CarGurus maintains a rock solid capital structure as shown in the following table.

	
Cash & equivalents (mrq)     $ 31.762 M
Working Capital	            $ 113.735 M
Current Ratio (mrq)	        3.25
Long-Term Debt (mrq)	        0
Stockholders’ Equity (mrq)  $ 156.391 M
LT Debt/Equity (mrq)	        0%
LT Debt/Capitalization	        0%


Stock-Based Compensation (SBC)

SBC/revenue ratios are favorably low.


**PERIOD	   SBC    SBC/Revenue**
	  ($ M)	
		
Q2 ‘18	  5.605	     5.1%
Q1 ‘18	  3.818	     3.9%
		
FY 2017	  5.028	     1.6%
FY 2016	  0.322	     0.2%
FY 2015   1.040	     1.1%

===============================================

CURRENT FINANCIAL STATUS

In the following table, I’ve included two competitors for comparisons.


**9/24/2018	       CarGurus	             [Cars.com](http://Cars.com) Inc.	         TrueCare**
			
GICS SECTOR	 InformationTechnology	   InformationTechnology     InformationTechnology
GISC INDUSTRY	Internet Software & Svcs Internet Software & Svcs  Internet Software & Svcs
			
MARKET CAP	      $ 5.945 B	               $ 1.897 B	         $ 1.445 B
Employees	          549	                 1,100	                     686
			
52-WK HIGH	        56.17	                 32.94	                   16.45
PRICE/SHARE 	        54.31	                 27.21	                   14.16
52-WK LOW	        25.85	                 20.94	                    8.75
			
Price Y-T-D change      81.2%	                 (5.7%)	                   26.4%
		
Price change 52-wk	96.9% (a)	          0.3%	                   (5.4%)
S&P 500 52-wk change	16.9%	                 16.9%	                   16.9%
			
EV/EBITDA (mrq)	       426.18	                 13.88	                  (60.04)
P/E (ttm)	       132.14	                 10.46	                     N/A
Fwd P/E	               175.19	                 27.77	                   54.46
EV/Revenue (ttm)	14.40	                  3.95	                    3.76
P/S (ttm)	        15.54	                  2.94	                    4.32
			
Gross Margin FY 17	94.4%	                 89.5%	                   91.3%
Operating Margin FY 17	 4.8%	                 22.9%	                  (10.7%)
Net Margin FY 17	 4.2%	                 35.8%	                  (10.2%)

Note: (a) Price change since IPO on 10/12/2017

On 10/12/2017, CarGurus went public, pricing its shares at $16 ahead of the IPO. CARG opened at $29 in its market debut and started trading at a premium, up 81%. Since its IPO, the CarGurus stock price has realized a substantial 96.9% gain to date 9/24/18 and hit its all-time high of $56.17 on 8/8/2018. This recent explosive growth in stock price, in turn, has caused soaring increases in EV/EBITDA and EV/S, the metrics that I watch and weigh among other key financial and growth indicators in the big picture.

Over the recent 52-week period, CARG has substantially and superbly out performed the S&P 500 and its competitors cars.com (CARS) and TrueCar (TRUE) as shown in the following Big Chart:
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?..

What separates CARG from these competitors is its high recurrent revenue and high gross margins, generated by marketplace subscription revenue from dealers through Listing and Dealer Display subscriptions and advertising revenue from auto manufacturers and other auto-related brand advertisers. The results are substantial YoY annual revenue growth for CARG versus its competitors as shown in the following table:


**REVENUE	 CARG	Change	 CARS	Change   TRUE	Change**
**($M)	 YoY	 ($M)	 YoY	 ($M)	 YoY**
						
2017	316.9	 60.0%	626.3	(1.1%)	323.1	 16.4%
2016	198.1	100.9%	633.1	 6.1%	277.5	  6.8%
2015	 98.6		596.5	20.3%	259.8	 25.8%
2014			496.0		206.6	

I should mentioned another competitor, Autotrader privately-held by Cox Automotive, that asserts on its website that it has more than 3 million vehicle listings from 40,000 dealers and 250,000 private owners and provides the largest selection of vehicles and attract more than 14 million qualified buyers each month.

CORPORATE MANAGEMENT

CarGurus was founded in 2006 by Langley Steinert, who currently serves as CEO and Board Chairman. Prior to founding CarGurus, Steinert was co-founder and Chairman of TripAdvisor, Inc., an online travel marketplace. Also on the Board of Directors is Steve Kaufer, who is co-founder, President and Chief Executive Officer of TripAdvisor, Inc.

At the last Q2 2018 results earnings conference call on 8/7/2018, CarGurus CEO Steinert commented about the addition of Steve Conine to the Board of Directors. Conine, co-founder of Wayfair in 2002 and currently its Co-Chairman, built his company into a global consumer brand. Steinert related that CarGurus expects to benefit from Conine’s engineering and product expertise and looks forward to his contributions.

SUMMARY

CarGurus remains one of my diversified holdings and thus far is a keeper in several of my family’s accounts. I look forward to reviewing and assessing the upcoming CARG Q3 financial results and overall performance.

As always, conduct your own due diligence and decision-making.

Regards,
Ray

52 Likes

Interesting - I’m intrigued. A while back there was a presentation circulated about investment lessons looking for the next microsoft type stuff. It had tons of case studies. The main conclusion was that the next microsoft is difficult to spot. Sometimes you can see the story unfolding sometimes not. One of the only commonalities was in many markets around the world the same story repeated - online market places for houses and cars and these were always underestimated and always multi baggers.

Ant

1 Like

I am in the market for a new car and came across CarGurus, not knowing what it was; just took a closer look after reading this thread and while it seems nea, as a consumer, my first question is why this over a site like autotrader?

Interesting to see the connections to TripAdvisor and Wayfair at the executive level. Obviously there is a lot of experience with these kinds of platforms.

Cargurus (CG) is an interesting middleman. They earn their money from the dealerships by delivering them customers. To do this they must deliver value to both parties, sales to the dealerships, a pleasant good experience to the car buyer and a price that everyone can accept.

Dealership discussion on CG price
https://www.drivingsales.com/forums/marketing/cargurus-huge-…

This is a very interesting thread about cargurus, also one of the most viewed and commented on threads about why dealers are going with them despite price increases. Conversion rates, leads, cost per lead, cost per sale etc etc. Worth a read.
https://forum.dealerrefresh.com/threads/cargurus-100-rate-in…

Here is a little arc of a guy who’s initial post was Jan 2016

“I received a nice “Happy New Year” email from Carguru’s stating that my rate would be increasing Feb 1st by 100%. I can continue with Carguru’s at this new rate or my account would be cancelled. Carguru’s has taken us from $750.00 monthly to $2620.00 and now in Feb to $5640.00. All in just under two years. Inventory has not changed significantly. I tried to negotiate the last rate hike and they had a “take it or leave it” stance. They definitely bring us a significant amount of our business but at this rate i’m not sure what to do.”

Two years later he posts the following. I’ve paraphrased a little bit.
May 2018
Carguru’s is back at it again with a rate increase from 4k to 50k (ok slight exaggeration). No consideration that we’ve been a partner since 2007. No consideration that margin compression is squeezing our profits to a minimum. Just some random Dude on the phone saying that’s the best they can do, no one else to talk to, he makes the decisions. So guess what. We cancelled! Anxiety level was high but it kinda felt good! Like when you finally break up with that girlfriend that you know is poison. We’ve now been off the site for 30 days and we have had an amazing month. 10% increase over last years numbers Carguru’s, we wont be subject to your predatory tactics. You hit us with a unfair rate increase, threaten to take me off the site while hoping to muscle me to take the increase. When I cancel, because i have no other choice, you then keep calling & negotiating the rate down. in 6 months my cars will be back on as free listings and leads come in with no info. then you try and get us back at a super low rate again. This is not the way to treat your customer! I will give my money to a true partner…”

Someone else replies to him saying CG is expensive, but the best in driving sales.

Here is a recent post on CG which sums up what I’ve been reading nicely.
I’m in the New York marketplace and what I have seen is a declining interest in both AutoTrader.com and Cars.com while a growing interest in CarGurus. It seems you are receiving less and less from the larger players while prices stay the same or increase. Then you have CarGurus who enters the market and in my opinion is really killing it in the marketplace (probably best product out there) at this point for used cars, but their tactics, with price increases and getting listed are very aggressive. Many dealers I have sat with have received these dreaded price increase letters and have pretty much been forced into paying the higher fees because there is a lot of traffic on the site.

https://www.cargurus.com/Cars/DealerPricingPolicy.html
I enjoyed this link, a description of what kind of pricing is ok and not on the car gurus website. A way to keep everything above board on the CG website

A completely unscientific poll of Cars.com VS AutoTrader.com VS CarGurus.com. https://forum.dealerrefresh.com/threads/cars-com-vs-autotrad… This thread develops over 2 years. STarts out very positive for cargurus and then into more discontent about pricing and strong arming by CG.

On a side note, I find it interesting that many of these dealerships don’t seem to have a strong handle on if they are actually profitable with the 3rd part lead generating services such as cars.com/autotrader/cg. It appears many of them just rely on what the 3rd party vendors tell them.

https://www.cbtnews.com/david-kain-third-party-car-sites-fit…
And finally a podcast about 3rd party car sites.

Been an interesting read, I can see why CG has had the stock price run up. How much blood can you get out of a turnip though. I don’t know the answer, but they operate in a crowded space and the general discontent with them seems to be increasing. For an ev/s of ~14.5 p/e >100 I’d want to see clear fields ahead because CG is priced that way. Personally I don’t see how they can maintain the growth as they are in a slugfest for dealers with the other 3rd party sites.

Best,
Ethan

4 Likes

I have lived through experience of investing in TrueCar (TRUE).
Very similar story… initial high value, high growth stagnates very fast… predatory tactics sustain till one of the large dealer flexes muscles and breaks up from the site… then comes crash and burn…

I do see one major difference - TRUE didnt have consumer to consumer direct trade services. CARG seems to offer that at $99 (when you sell your car)… not sure if the service has any real revenue generation… if they can grow this segment to a large revenue, it may be very interesting but not sure if they can really fight the free craigslist!

A while back there was a presentation circulated about investment lessons looking for the next microsoft type stuff. It had tons of case studies.

But the real problem is, once people do find the next Microsft, they don’t have the patience. They sell half when it doubles or all when it is a 5 bagger. So few can hold on long enough for it to really matter.

P

2 Likes

Wanted to share this since it is somewhat relevant; wife and I were looking at Buicks this weekend and found a couple in the area that we liked through ads on CarGurus.com. One in particular was almost exactly what we wanted, drove 30 miles to the dealer only to find out the car had been sold… last November…

The sales guy had no idea why the ad was still up, he said these 3rd party websites have software that automatically pulls data from the dealer, so I don’t think this an instance where somebody from the dealer forgot to update the ad. I cross referenced Autotrader and the same car was nowhere to be found.

Yes, I could have called the dealer ahead, but the CarGurus ad made me believe the status was updated regularly based on some of the data they display.

Maybe this was a fluke, but I probably won’t be using the site again.

3 Likes