Key points
- Cars.com and Carvana have released two starkly different earnings reports that say more about each company’s business model than its investment status.
- The latest consumer confidence reading was weaker than expected, throwing another curveball into the market.
- While both stocks have concerns, analysts give CARS stock more upside, but a rate cut or two could change that.
- 5 stocks we prefer to Carvana
Cars.com Inc. NYSE: AUTOMOBILE AND Carvana Co. NYSE:CVNA they are two different ways of operating in the automotive retail market. Both companies are attempting to modernize and digitize the car buying experience. However, the two automotive stocks perform very differently.
Despite the year-over-year revenue decline, CVNA shares are up 739% over the past 12 months. The catalyst is a pause and the likely end of the Federal Reserve’s interest rate raising campaign. Another is the year-over-year improvement in the company’s earnings per share. Carvana isn’t profitable yet, but losses are narrowing.
Cars.com has beaten in terms of revenue and earnings on a year-over-year basis, but the stock is down 6.25% over the past 12 months, with most of those losses coming since the start of July 2023, when CARS stock dropped reached a four-year high of $22.84.
What did the earnings say?
Both companies reported earnings on February 22, 2024. For Cars.com, the report was about the same. It reported higher year-on-year revenue but missed earnings per share (EPS) of three cents. The company is profitable and expects earnings growth of 28% over the next 12 months. For 2024, Cars.com expects 6%-8% revenue growth with 28%-30% growth in adjusted EBITDA margins.
Carvana reported lower-than-expected earnings, continuing a trend that has been underway for several quarters. The company also missed EPS guidance by three cents per share. Carvana is not expected to post a profit next year, although it expects smaller losses. The company also issued tepid forward guidance saying only that it expects revenue and earnings to improve from 2023.
But what do these ratios mean, if any, for investors?
They just sound the same
Both Cars.com and Carvana are part of the Retail/Wholesale industry, but this is where the similarities diverge. Carvana is more of a dealership, albeit in a digital sense. In contrast, Cars.com is more of a matchmaker that connects buyers with sellers.
This is an important distinction for investors. Both companies are considered to be in the retail/wholesale business. But while Carvana is classified in the car dealership industry, Cars.com (as the name suggests) is classified in the data processing and preparation category.
This means that analysts and investors evaluate the stock in different ways. Cars.com is more of a social media stock with metrics like average monthly unique visitors (UV), traffic (calculated from visits), and average monthly revenue per dealer (ARPD).
In contrast, Carvana is about buying and selling cars. The transactional nature of the site is very consumer-centric and excludes the retailer.
The consumer is weakening…maybe?
On February 27, 2024, five days after companies reported earnings, the Conference Board’s latest data on consumer confidence was released. It showed its first decline after three months of improving data.
Additionally, a specific part of the report measuring America’s short-term expectations for income, business and the job market fell to 79.8. Not only was the value below 81.5 in January, but historically anything below 80 signals an impending recession.
Should you buy one, both, or neither?
Based on what you know about each company, you would expect analysts to deviate from their expectations for CVNA stock. However, following the earnings report, CVNA shares jumped 43% on the back of bullish analyst sentiment.
That said, Carvana analyst ratings on MarketBeat have a consensus rating of Down and a consensus price target of $41.53, which is more than 49% lower than the current price. Notably, JMP Securities’ highest price target is $80, just one step below the stock’s closing price of $81.95 on February 27, 2024.
Cars.com has a Moderate Buy consensus rating with a price target of $24, 29% higher than the stock’s closing price of $18.47 on February 27, 2024.
However, interest rates will likely influence your decision to take a position in either stock. If the Federal Reserve cuts interest rates, it could spur purchasing activity by bringing some consumers back into the market.
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