Over the past six months, Cars.com’s stock price fell to $11.34. Shareholders have lost 10% of their capital, which is disappointing considering the S&P 500 has climbed by 9.6%. This might have investors contemplating their next move.
Is now the time to buy Cars.com, or should you be careful about including it in 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 cautious about Cars.com. Here are three reasons we avoid CARS 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 19,526. 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 2.5%, close to This projection is underwhelming and indicates its newer products and services will not catalyze better top-line performance yet.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Cars.com, its EPS declined by 2% annually over the last three years while its revenue grew by 3.8%. 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 doesn’t pass our quality test. After the recent drawdown, the stock trades at 5× forward EV/EBITDA (or $11.34 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
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