3 Key Reasons to Avoid CARS and One Alternative Stock Worth Buying

Cars.com Stock Performance: A Closer Look

In the last half-year, Cars.com shares have dropped to $11.34, resulting in a 10% loss for investors. This decline stands in stark contrast to the S&P 500’s 9.6% gain over the same period, leaving shareholders questioning their next steps.

Should you consider adding Cars.com to your portfolio, or does it pose unnecessary risk?

Why We’re Not Enthusiastic About Cars.com

Although the stock price has become more attractive, we remain wary of Cars.com for several reasons. Below, we outline three key concerns and suggest an alternative stock we prefer.

1. Dealer Growth Has Stalled

Cars.com’s business model relies on expanding its user base and increasing the average transaction value. However, over the past two years, the number of dealer clients has remained stagnant at 19,526. This stagnation is concerning, especially given the ongoing growth in online activity, which should present new opportunities. For Cars.com to reignite growth, it will likely need to improve its current offerings or introduce innovative products.

2. Modest Revenue Growth Forecast

Analyst projections are a useful indicator of a company’s future prospects. While forecasts are not always precise, accelerating revenue growth tends to drive higher valuations, whereas slowing growth can have the opposite effect. For the coming year, analysts expect Cars.com’s revenue to increase by just 2.5%. This tepid outlook suggests that recent product launches are unlikely to significantly boost sales in the near term.

3. Declining Earnings Per Share

We pay close attention to long-term trends in earnings per share (EPS) to gauge whether a company’s expansion is translating into profitability. Unfortunately, Cars.com’s EPS has decreased by an average of 2% per year over the past three years, even as revenue grew by 3.8%. This indicates that the company is becoming less profitable on a per-share basis as it grows.

Our Verdict

While Cars.com is not a fundamentally poor business, it does not meet our quality standards. The stock is currently valued at 5× forward EV/EBITDA (or $11.34 per share), which appears reasonable. However, the company’s weaker fundamentals introduce significant downside risk. We believe there are more attractive investment opportunities available. For example, consider the leading endpoint security platform in the market.

Better Alternatives to Cars.com

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