Cars.com has been treading water for the past six months, recording a small loss of 2.3% while holding steady at $11.67. The stock also fell short of the S&P 500’s 8.6% gain during that period.
Is now the time to buy Cars.com, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Cars.com Not Exciting?
We don’t have much confidence in Cars.com. Here are three reasons you should be careful with CARS, plus one stock we’d rather own.
1. Dealer Customers Hit a Plateau
As an online marketplace, Cars.com generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.
Cars.com struggled with new customer acquisition over the last two years as its dealer customers were flat at 19,390. This performance isn’t ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Cars.com wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products. 
2. Customer Spending Decreases, Engagement Falling?
Average revenue per buyer (ARPB) is a critical metric to track because it measures how much the company earns in transaction fees from each buyer. ARPB also gives us unique insights into a user’s average order size and Cars.com’s take rate, or “cut”, on each order.
Cars.com’s ARPB fell over the last two years, averaging 1% annual declines. This signals its platform’s value is eroding when paired with its inability to grow dealer customers. If Cars.com wants to increase its buyers, it must either develop new features or provide some existing ones for free. 
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Cars.com’s weak 1.4% annual EPS growth over the last three years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.
Final Judgment
Cars.com isn’t a terrible business, but it isn’t one of our picks. With its shares trailing the market in recent months, the stock trades at 5× forward EV/EBITDA (or $11.67 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.
Stocks We Like More Than Cars.com
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