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With a shift in its business model, CarGurus is becoming a one-stop-shop for car buyers and dealers.

Among the topics on consumers' minds over the past several months has been the increase in prices of new and used cars. With the semiconductor shortage limiting new car manufacturing, reduced supply has increased car prices for consumers. This trend naturally led to a rise in used car prices as well.

Poised to help both car buyers and dealers navigate these difficult times is CarGurus (CARG -1.82%). Their name may not be top of mind for most consumers, but the company has been quietly putting up impressive results quarter after quarter. With a recent shift in its business model, CarGurus has strengthened its core business while expanding its market footprint.

Image source: Getty Images.

A marketplace for car shoppers

CarGurus' core business is an online marketplace that aggregates the inventories of thousands of dealers. Prospective car buyers log on to search for cars and get to see new and used inventories from various dealers. What separates CarGurus from its competitors is that results are sorted by its proprietary Deal Rating, which scores each vehicle by its price relative to the recent sale prices of comparable models. This unique data point provides shoppers with valuable information not found on other sites, and the metric is calculated at a level of transparency that CarGurus sees as a competitive advantage.

The majority of revenue for CarGurus comes from the subscriptions dealers pay to be listed on the website. While a free listing is available, it's very restricted, providing dealers with limited data and hiding their dealership information from buyers. With each progressively more expensive subscription package, dealers have access to more data and exposure to potential buyers.

From the perspective of CarGurus' management, this marketplace has a network effect that drives business performance. The more dealers on the platform, the better the experience for the buyers. The more happy buyers there are, the more dealers see the return on their subscription investment. The results have been impressive. At the end of 2021, CarGurus' website had 32 million average monthly visitors who could see listings from over 23,000 dealers with paid subscriptions.

Getting into the wholesale game

In January 2021, CarGurus acquired a majority interest in CarOffer, a company disrupting how car dealers traditionally trade inventory with one another. Rather than dealers attending in-person auctions to buy and sell inventory, CarOffer allows dealers to buy and sell to other dealers online, with the logistics taken care of by CarOffer.

This acquisition also allowed CarGurus to roll out its Instant Max Offer, which provides a way for shoppers to get a competitive offer on their current vehicle's trade-in as part of the experience of buying a new one.

In addition to this new feature for car buyers, CarGurus has rolled out features such as financing and the ability to customize how much of the car buying experience can be done online, catering to each customer's specific desires and comfort level.

Accelerated growth

CarGurus' recently reported Q4 and FY2021 results were impressive. Revenue for the year was $951 million, an increase of 73% year over year (YOY). Marketplace revenue, the core listing business, comprised 67% of overall revenue. This is high-margin subscription revenue, which helped contribute to CarGurus' gross margin of 69%. That's a significant decrease from the 92% gross margin seen in 2020, but this was to be expected with the addition of the wholesale business.

CarGurus is also improving how it monetizes its dealers. Its quarterly average revenue per subscribing dealer (QARSD) rose 6% to $5,633 in 2021. What's more impressive is that this increase came as monthly unique users and monthly website sessions were each down 12% YOY.

Why is now the time to buy?

After its recent earnings report, CarGurus saw its stock jump over 40%, so it might be natural for investors to ask whether they missed the boat. As impressive as that one-day result is, the stock is still only trading for five times trailing sales, a multiple last seen in late 2021. CarGurus is just starting to see the impact of its CarOffer acquisition and is guiding for triple-digit revenue growth in Q1. If the company can meet or beat its guidance, its current valuation could end up looking like a bargain.

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