CARG: NASDAQ

The views expressed below are those of Anchor Capital Advisors, LLC (“Anchor”) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

CARG: NASDAQ

CarGurus Inc is a global, online automotive marketplace connecting buyers and sellers of new and used cars.[1] They have 44 million monthly unique visitors, 30,000 paying dealers, and do over $500 million in revenue. It was founded in 2006 by Langley Steinart and is based in Boston, MA.[2]

Investment Thesis

In our view, CarGurus should be able to raise price over time. We believe the business should grow revenue and earnings that they should benefit from their recent acquisition of CarOffer and from their push into digital retail. In our opinion, this is a high quality company, this is based on its return metrics, gross margins, and operating margins.

Confirmation through Research

We believe that CarGurus is priced 30% to 60% cheaper than its main competitors and can raise price to high single digits, even double digits over time.[3] For every $1 of pricing, it has 100% contribution margin to the bottom line.[4] In our opinion, the CarOffer acquisition can help them grow a strong digital wholesale business. CarOffer has 3000 dealers, with CarGurus having 30,000 dealers.[5] Over time, we believe CarOffer can be added to many of the CarGurus dealers, which should lead to very strong revenue growth for CarOffer. It could be possible for CarOffer to be 5 to 10 times bigger than it is today. We believe that CarGurus has the opportunity to help dealers with digital retail, as the compete against Carvana.[6] This could include helping with logistics, buy it now functionality on the CarGurus website, and dealer website design. Finally, it is our opinion that the company is high quality based on its return metrics, gross margins, and operating margins. The company has gross margins of 94%, operating margins of 27%[7], which in our view, is much higher than most public companies. Further, their return on assets is 17% and return on investments is 20%[8], which we consider to be quite high.

Variant Perception

We do not believe the market is assigning fair value to the business considering the pricing opportunity, CarOffer dealer roll out, push into digital retail, and finally the high quality nature of the business. If the management can execute on these key initiatives, it should help the shares re-rate over time, to what we would consider more appropriate valuations.