TrueCar may be placing its bet in a business model that is deemed to fail as revenue growth slows down and losses continue to increase. Investors might become interested in the company's stock, but the stock might be poised to continue to fall.
TrueCar was put in the Danger Zone on August 21, 2017. At the time, investors were warned that the company’s business model could not adequately serve the interests of both car dealers and consumers. Since the article, the stock is down 62% while the S&P 500 is up 15%.
It's been predicted predicted in articles that TrueCar's heavy focus on dealers would alienate consumers and lead to slowing growth and rising losses.
Investors who only look at GAAP net income might think I got that prediction wrong, as TRUE’s GAAP losses decreased from -$33 million in 2017 to -$28 million in 2018. However, adjustments show that the company’s losses, as measured by after-tax operating profit (NOPAT), did in fact increase.
TRUE’s GAAP losses in 2017 were overstated due to $8 million (2% of revenue) in litigation costs. When this cost and other non-recurring expenses are adjusted, operating losses have increased from $19 million in 2017 to $22 million in 2018, a 12% increase.
In the past, TRUE could at least claim to be on a path to profitability. Now as losses grow, it’s hard to see exactly how the company breaks even over the long-term.