Why We Like The Returns At CarGurus (NASDAQ:CARG)

CarGurus (NASDAQ:CARG), a digital marketplace connecting car buyers and sellers, has emerged from a challenging period with renewed momentum in its core business. Despite mixed performance across segments, the company’s Q1 2025 results and strategic actions highlight compelling opportunities for investors. Let’s dissect the data to understand why returns here could be worth considering.

Core Marketplace Momentum: The Engine of Growth

At the heart of CarGurus’ value proposition is its Marketplace segment, which grew by 13% year-on-year (YoY) to $212.2 million in Q1 2025. This marks a reversal of previous declines and underscores the platform’s ability to attract both dealers and consumers. The average revenue per subscribing dealer (QARSD) rose 9% YoY to $6,173, with U.S. dealers contributing a robust 10% increase to $7,369. This suggests dealers are spending more on the platform, likely due to improved tools and data-driven insights that enhance their sales efficiency.

The Marketplace’s resilience is critical because it now represents 94% of total revenue—a sign of focus on what works. Management’s emphasis on AI integration and online transaction capabilities could further solidify this segment’s dominance. However, the company’s Wholesale and Product segments declined sharply (51.9% and 58.6% YoY, respectively), raising questions about their strategic value. For now, these headwinds appear manageable as resources are reallocated to prioritize high-margin areas.

Operational Efficiency and Profitability: Margins on the Rise

CarGurus’ profitability improved significantly in Q1. Non-GAAP diluted EPS hit $0.46, beating estimates by 5.5%, while adjusted EBITDA margins expanded to 29.4%, up from 25.2% in Q1 2024. The GAAP net income surged 83% YoY to $39.0 million, reflecting better cost management and higher gross profit. These metrics are particularly encouraging because they signal that the company can grow revenue and control expenses simultaneously.

The operational turnaround is also evident in free cash flow, which held steady at a 26.8% margin. With a Zacks Rank #3 (Hold), the stock’s valuation appears to lag its fundamentals, creating an opportunity for investors.

Strategic Capital Allocation: Betting on Undervaluation

CarGurus’ management has aggressively returned capital to shareholders, repurchasing $184.2 million of stock in Q1—equivalent to 6% of outstanding shares. This move signals confidence in the company’s intrinsic value, especially given its $2.80 billion market cap. While the stock underperformed the S&P 500 in the past month, its 5% post-earnings jump to $29.35 suggests investor optimism.

The company’s guidance for Q2 2025 is cautiously optimistic, with non-GAAP EPS projected at $0.52–$0.58, well above the consensus of $0.45. This confidence is rooted in margin expansion and Marketplace’s growth trajectory.

Weaknesses to Monitor

The 49% YoY decline in total transactions to 5,209 is concerning. While seasonality or shifts in dealer behavior could explain this drop, it raises questions about the platform’s ability to drive meaningful deals. Additionally, the underperformance of non-core segments (Wholesale and Product) suggests CarGurus may need to either pivot these divisions or fully exit them to avoid diluting focus.

Conclusion: A Compelling Risk-Adjusted Opportunity

CarGurus’ Q1 results paint a company refocused on its strengths, with its core Marketplace business delivering double-digit growth and improving margins. While challenges in non-core areas and transaction volatility remain risks, the stock’s valuation, strong cash flow, and aggressive buybacks make it an attractive play for investors willing to look past short-term noise.

The 13% growth in Marketplace revenue, 9% rise in QARSD, and 83% jump in GAAP net income collectively suggest a turnaround is underway. With a 6.2% annual revenue growth outlook for the next 12 months—modest but achievable—CarGurus appears positioned to capitalize on its digital leadership in the auto market.

For investors, the key is to weigh the Marketplace’s potential against execution risks. If management can sustain margin improvements and stabilize transaction volumes, the stock’s current price of $29.35 could offer a 20% upside over the next 18 months, based on consensus estimates and historical valuations. In a sector where tech giants like Amazon and Google are expanding their automotive offerings, CarGurus’ niche focus and dealer-centric model may yet prove its moat.

In sum, CarGurus’ returns are worth liking—not because it’s a sure bet, but because its core business is firing on all cylinders at a price that reflects uncertainty, not potential.