Inventory Stabilizes, But Cars.com Lags Peers: Analyst Flags Profit Pressures

As the automotive market begins to stabilize, with new car inventory levels increasing by 35% compared to 2023, one might expect Cars.com (CARS) to capitalize on the improving conditions. However, a closer look at the company's recent financial performance reveals a different story. In this article, we will explore the profit pressures faced by Cars.com and discuss how the company can mitigate these challenges to stay competitive in the evolving market landscape.



Profit Pressures Mount for Cars.com

Cars.com's recent financial results have been mixed, with subscription-based Dealer revenue declining 1% year-over-year in the fourth quarter of 2024, reflecting external pressures on dealer profitability and marketing spend. While OEM and National revenue grew 15% year-over-year, capturing strong demand from automakers seeking increased consumer awareness, the decline in Dealer revenue highlights the challenges faced by the company (Source: Cars.com Inc. (CARS) Q4 2024 Earnings Call Transcript).



Analysts Sound the Alarm

Analysts have taken notice of Cars.com's profit pressures, with JP Morgan analyst Rajat Gupta cutting the price forecast on CARS from $21.00 to $17.00 while reiterating a Neutral rating. Gupta cited a significant fourth-quarter miss versus prior guidance, largely due to reduced dealer spending as inventory levels stabilized (Source: Cars.com Inc. (CARS) Q4 2024 Earnings Call Transcript).



Mitigating Profit Pressures: A Path Forward for Cars.com

To address the profit pressures and stay competitive, Cars.com can consider the following strategies:

1. Diversify revenue streams: Expanding into new areas such as OEM and National revenue, as seen in the company's strong growth in this segment, can help mitigate the impact of declining dealer revenue. Additionally, the acquisition of DealerClub adds dealer-to-dealer, reputation-based wholesale auction capabilities to the Cars Commerce platform, further diversifying revenue streams (Source: Cars.com Inc. (CARS) Q4 2024 Earnings Call Transcript).
2. Improve operational efficiency: By integrating DealerClub and cross-selling solutions, Cars.com can drive ARPD and transaction revenue growth in 2025 and beyond. This strategy can help offset the impact of declining dealer revenue and improve overall profitability (Source: Cars.com Inc. (CARS) Q4 2024 Earnings Call Transcript).
3. Adapt to market trends: As the automotive market evolves, Cars.com must stay ahead of trends and adapt its offerings to meet changing consumer demands. For instance, the increasing demand for electric vehicles (EVs) presents an opportunity for the company to expand its offerings in this segment, as seen in the growing demand for new EVs (up 10% YoY) and the substantial drop in used EV prices (Source: Cars.com Inc. (CARS) April Industry Insights Report).
4. Strengthen the balance sheet: Cars.com's strong financial position, as evidenced by its record full-year revenue of $719 million (up 4% YoY) and $153 million of annual net cash provided by operating activities (up 12% YoY), allows the company to explore strategic investments and acquisitions to drive long-term growth (Source: Cars.com Inc. (CARS) Q4 2024 Earnings Call Transcript).

By implementing these strategies, Cars.com can effectively address the profit pressures it faces and maintain its competitive edge in the automotive market.



In conclusion, while the automotive market is stabilizing, Cars.com faces unique profit pressures that require the company to adapt and innovate. By diversifying revenue streams, improving operational efficiency, staying ahead of market trends, and strengthening its balance sheet, Cars.com can effectively address these challenges and capitalize on the opportunities presented by the evolving market landscape.