Online auto marketplace CarGurus (NASDAQ:CARG) reported Q3 CY2024 results exceeding the market’s revenue expectations, with sales up 5.4% year on year to $231.4 million. Guidance for next quarter’s revenue was better than expected at $229 million at the midpoint, 1.5% above analysts’ estimates. Its GAAP profit of $0.21 per share was 26% below analysts’ consensus estimates.
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CarGurus (CARG) Q3 CY2024 Highlights:
- Revenue: $231.4 million vs analyst estimates of $223.5 million (3.5% beat)
- EPS: $0.21 vs analyst expectations of $0.28 (26% miss)
- EBITDA: $64.88 million vs analyst estimates of $60.8 million (6.7% beat)
- Revenue Guidance for Q4 CY2024 is $229 million at the midpoint, above analyst estimates of $225.6 million
- Gross Margin (GAAP): 78.9%, up from 74.9% in the same quarter last year
- Operating Margin: 11.9%, up from 10.5% in the same quarter last year
- EBITDA Margin: 28%, up from 22.4% in the same quarter last year
- Free Cash Flow Margin: 17.9%, similar to the previous quarter
- Paying Dealers: 31,684, up 493 year on year
- Market Capitalization: $3.4 billion
"We are proud of our third quarter results as our Marketplace revenue growth further accelerated, and we leveraged our cost base to drive operating efficiencies," said Jason Trevisan, Chief Executive Officer at CarGurus.
Company Overview
Bringing transparency to a sometimes opaque process, CarGurus (NASDAQ:CARG) is a digital marketplace where auto dealers can connect with potential customers and where car buyers can browse, purchase, and obtain financing.
Online Marketplace
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission-paying sellers, generating flywheel scale effects that feed back into further customer acquisition.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, CarGurus’s sales grew at a sluggish 5.2% compounded annual growth rate over the last three years. This shows it failed to expand in any major way, a rough starting point for our analysis.
This quarter, CarGurus reported year-on-year revenue growth of 5.4%, and its $231.4 million of revenue exceeded Wall Street’s estimates by 3.5%. Management is currently guiding for a 2.6% year-on-year increase next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 6% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and indicates the market thinks its newer products and services will not catalyze better top-line performance yet.
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Paying Dealers
User Growth
As an online marketplace, CarGurus generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.
CarGurus struggled to engage its paying dealers over the last two years as they have been flat at 31,684. This performance isn't ideal because internet usage is secular. If CarGurus wants to accelerate growth, it must enhance the appeal of its current offerings or innovate with new products. 
Luckily, CarGurus added 493 paying dealers in Q3, leading to 1.6% year-on-year growth. The quarterly print was higher than its two-year result, suggesting its new initiatives are accelerating user growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like CarGurus because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and CarGurus’s take rate, or "cut", on each order.
CarGurus’s ARPU growth has been excellent over the last two years, averaging 9.3%. Although its paying dealers were flat during this time, the company’s ability to successfully increase monetization demonstrates its platform’s value for existing users. 
This quarter, CarGurus’s ARPU clocked in at $6,038. It grew 13.6% year on year, faster than its paying dealers.
Key Takeaways from CarGurus’s Q3 Results
We were impressed by how significantly CarGurus blew past analysts’ EBITDA expectations this quarter. We were also glad its revenue outperformed Wall Street’s estimates. On the other hand, its revenue growth regrettably slowed. Overall, this quarter had some key positives. The stock traded up 10.8% to $37 immediately following the results.
Indeed, CarGurus had a rock-solid quarterly earnings result, but is this stock a good investment here? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
