CarGurus’ (NASDAQ:CARG) IPO last week was very successive for the underwriters as the stock jumped on day 1 from $16 all the way to $29 (a market cap of nearly $3 billion). Now it is already traded at $33. This behavior is very similar to what happened recently at SnapChat (SNAP), Roku (ROKU) IPOs. Both of them surged sharply immediately after the IPO, but have started to fall down later on. I predict that CARG will behave similarly in the next 12 months after the hype cools down and investors realize that the stock is extremely overvalued. Who is this CARG?
Who is this CARG?
CarGurus is an online marketplace connecting buyers and sellers (dealers and individuals) of new and used cars. The company makes money from subscription fees it collects from car dealerships that offer their vehicles for sale on the site, and from selling advertising space. It operates in a market saturated with competitors with strong brands such as AutoTrader, Cars.com (NYSE:CARS) (which I own in my Spin-off portfolio), Edmunds, KBB, Autoweb (AUTO), Carfax, TrueCar (TRUE), NadaGuides and more.
CarGurus claims to have an advantage over competitors because of a smart algorithm that can weigh many parameters and predict the “fair” price of used cars. According to the company, only this algorithm determines the ranking of the vehicle dealership displayed on the site, rather than how much money it has paid for advertising (which is probably what is happening on most sites). Thus, according to them, the client can best understand whether it is a worthwhile deal or a bid at an excessive price. This feature is indeed useful, but I’m not sure that it gives the company a significant advantage over competitors, which also have mechanisms that help the customer make an informed decision. In the end, the choice of a customer on which site to use is probably determined by the reliability of the site, less in what sophisticated ranking algorithm it offers. What’s more, according to eMarketer’s latest report, the automotive advertising market stood at $9.1 billion at the end of 2016 and is expected to grow to $15.2 billion in 2020, so the business is large enough to feed a wide range of players in the industry, including CarGurus.
The above article was sourced from SeekingAlpha.