Car Sales Are Slowing. Car-Listing Websites Are Just Getting Started.
Summary
A not-too-hot, not-too-cool market is just the right temperature for online auto platforms.Auto retail is finally shifting from a seller’s market to a buyer’s market: Dealers’ car lots are looking fuller, while high interest rates are making consumers choosier. That spells opportunity for online marketplaces such as Cars.com, CarGurus and TrueCar that stand to do well when manufacturers and dealers become more desperate.
CarGurus and Cars.com are among the largest online platforms that consumers use to shop for cars. They primarily earn money from dealers paying subscription fees in exchange for having their inventory listed. Dealers and car manufacturers can also pay for advertising slots and additional features their potential customers might value, such as online appraisals and loan screening. CarGurus also has a transaction platform that makes instant offers to consumers and acquires inventory outright before flipping vehicles to dealers.
Such websites have become valuable research tools for shoppers, for whom cars are among their most expensive purchases—second only to homes. But dealers understandably have a love-hate relationship with them: The exposure is great, but the transparency can make pricing dynamics more competitive. Moreover, some dealers end up allocating a substantial portion of their marketing expenses for placement on these platforms. One dealer interviewed by analysts at UBS, for example, said about half of the company’s marketing spending was allocated to third-party sites such as Cars.com and CarGurus.
Nevertheless, dealers recognize that they need the platforms because that’s where consumers do their research, according to Kunal Madhukar, equity analyst at UBS. Cars.com estimates that there are about 40,000 dealerships across the U.S., roughly half of which list on its website. CarGurus had more than 24,000 paying dealers in the U.S. as of year-end 2022. Cars.com has a higher mix of franchised dealer clients, while CarGurus is more heavily weighted to independent dealers that only sell used cars.
CarGurus Chief Executive Officer Jason Trevisan said dealers’ marketing budgets primarily depend on car inventory and consumer sentiment for buying cars. The height of the pandemic—when chip shortages limited the number of cars available—was a tougher time for these marketplaces to raise charges or upsell additional services to their dealer clients. Cars practically sold themselves. Now, though, with inventory normalizing and consumers facing steep financing costs, online platforms are spotting an opportunity to upsell dealers. In its earnings call last month, Cars.com CEO Alex Vetter said dealers who aren’t seeing cars get sold as quickly off their lots are turning to the company for additional media services.
After keeping prices largely flat over the pandemic, Cars.com and CarGurus have begun raising prices on their dealer clients this year. Notably, advertising expenditures for U.S. new-car dealerships recovered somewhat last year, but they remain about 7% below prepandemic levels, according to data from the National Automobile Dealers Association. It is tough to gauge what the total addressable market is, but Trevisan says the dealers’ marketing budgets—including independent dealers—total about $20 billion a year, based on third-party estimates. Together, Cars.com and CarGurus’ marketplace platforms are poised to make about $1.3 billion this year from dealers, per analyst estimates polled by Visible Alpha.
Online platforms’ negotiating power could be diminished somewhat if auto workers’ strikes are prolonged enough to crimp new-car inventory again. And while new-car inventory has been recovering at a healthy clip, used-car inventory recovery has been bumpier after demand for used vehicles unexpectedly picked up in the late summer. CarGurus relies more on used-car sellers, while Cars.com has a higher proportion of franchise dealers.
Those favorable dynamics haven’t gone unnoticed, with Cars.com and CarGurus shares each gaining roughly 25% year to date. Yet their valuation—enterprise value as a multiple of forward sales—still looks fairly reasonable, with CarGurus and Cars.com’s multiples at 54% and 8% below their five-year averages, respectively.
As long as the car-selling environment remains lukewarm—not as hot as during the worst of the pandemic but not as cold as during the 2007-09 recession—online platforms seem poised to grow at a good pace.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
