3 Reasons to Sell CARS and 1 Stock to Buy Instead

Shareholders of Cars.com would probably like to forget the past six months even happened. The stock dropped 36.9% and now trades at $11. This might have investors contemplating their next move.

Is there a buying opportunity in Cars.com, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Cars.com Not Exciting?

Even though the stock has become cheaper, we're swiping left on Cars.com for now. Here are three reasons why CARS doesn't excite us and a stock we'd rather own.

1. Dealer Customers Hit a Plateau

As an online marketplace, Cars.com generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

Cars.com struggled with new customer acquisition over the last two years as its dealer customers were flat at 19,250. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Cars.com wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Cars.com’s revenue to rise by 1.5%, a deceleration versus This projection is underwhelming and suggests its products and services will see some demand headwinds.

3. EPS Barely Growing

We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Cars.com’s EPS grew at a weak 1.9% compounded annual growth rate over the last three years, lower than its 4.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

Cars.com isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 3.2× forward EV/EBITDA (or $11 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.

Stocks We Like More Than Cars.com

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