CarGurus vs. Shift Technologies: Which Automobile Dealership Stock is a Better Buy?

CarGurus, Inc. (CARG) in Cambridge, Mass., and San Francisco’s Shift Technologies, Inc. (SFT) are two prominent players in the auto dealership space. CARG operates an online automotive marketplace that connects buyers and sellers of new and used cars and related accessories with dealers in the U.S., U.K., Canada, and Germany, using proprietary technology, search algorithms, and data analytics. SFT provides an end-to-end auto e-commerce platform for buying and selling used cars.

Because a global semiconductor chip shortage is forcing automakers to reduce new vehicle production, the auto industry has of late witnessed a surge in demand for used cars. The demand for new vehicles is also on the rise. And consumers’ desire to avoid public transport amid the resurgence of COVID-19 cases should keep driving the demand for cars in the coming months. The global Automotive Dealer Management Systems (DMS) market is expected to grow at 6.8% CAGR to $5.58 billion by 2026. So, both SFT and CARG should benefit.

While SFT’s shares have gained 4.2% in price over the past three months, CARG has surged 10%. CARG is a clear winner with 8.6% price gains versus SFT’s negative returns in terms of the past month's performance. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On July 30, 2021, CARG introduced CarGurus Instant Max Cash Offer, a new offering powered by its CarOffer inventory management platform that enables consumers to sell their vehicles online to the highest offering dealers within its network via CarOffer’s Buying Matrix platform. CARG is looking forward to witnessing high demand from the used car industry.

On July 06, 2021, SFT launched two new markets in Dallas and the Fort Worth region in Texas for consumers to buy its cars, using SFT’s unique direct-to-consumer, at-home service. SFT is looking forward to expanding its portfolio and delivering a better customer experience across the State.

Recent Financial Results

CARG’s revenues for its fiscal second quarter, ended June 30, 2021, increased 129.8% year-over-year to $217.75 million. The company’s non-GAAP gross profit came in at $167.54 million, up 94.8% from the prior-year period. Its non-GAAP operating income increased 179.6% year-over-year to $68.94 million. While its non-GAAP net income increased 132.4% year-over-year to $49.54 million, its non-GAAP EPS increased 115.8% to $0.41. As of June 30, 2021, the company had $184.64 million in cash and cash equivalents.

For its fiscal second quarter, ended June 30, 2021, SFT’s total revenue increased 377.3% year-over-year to $154.85 million. The company’s gross profit came in at $16.33 million, up 357.1% from the prior-year period. SFT’s loss from operations came was  $33.37 million for the quarter, representing a 174.5% year-over-year rise. Its net loss was  $31.66 million, up 66.7% from the prior-year period. Its loss per share increased 92.9% year-over-year to $0.41. The company had $238.24 million in cash and cash equivalents as of June 30, 2021.

Expected Financial Performance

Analysts expect CARG’s revenue to increase 50.4% year-over-year in the current year and 17.6% next year. Its EPS is expected to grow 30.6% year-over-year in the current year but decline 1.3% next year.

In comparison, SFT’s revenue is expected to increase 200% year-over-year in the current year and 71.9% next year. Its EPS is expected to remain negative in the coming quarters of the current year and next year.

Profitability

CARG’s trailing-12-month revenue is almost 1.7 times SFT’s. CARG is also more profitable, with an 86.3% gross profit margin versus SFT’s 7.4%.

Also, CARG’s ROE, ROA, and ROTC values of 23.3%, 15.7%, and 17.7%, respectively, compare favorably with SFT’s respective negative values.

Valuation

In terms of non-GAAP forward P/E, CARG is currently trading at 22.23x, compared with SFT’s negative 3.80x.

In terms of trailing-12-month Price-to-Book, CARG’s 6.63x is 58.6% higher than SFT’s 4.18x.

POWR Ratings

While SFT has an overall F grade, which translates to Strong Sell in our proprietary POWR Ratings system, CARG has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

Both SFT and CARG have a C grade for Momentum, which is in sync with their mixed price performance. CARG has returned 10% in price over the past three months. SFT has gained 4.2% over the past three months.

In terms of Quality, CARG has been graded an A, which is in sync with its higher-than-industry profitability ratios. In addition, CARG has a 13.8% trailing-12-month return on total capital, which is 449.7% higher than the 2.5% industry average. However, SFT’s F grade for Quality is in sync with its negative trailing-12-month return on total capital.

Of the 25 stocks in the B-rated Auto Dealers & Rentals industry, SFT is ranked #25. In comparison, CARG is ranked #5 of 75 stocks in the Internet industry.

Beyond what we’ve stated above, our POWR Ratings system has also rated CARG and SFT for Growth, Value, Sentiment, and Stability. Get all SFT ratings here. Also, click here to see the additional POWR Ratings for CARG.

The Winner

While both SFT and CARG should benefit from the industry tailwinds, we think its higher profitability and better financials make CARG a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Auto Dealers & Rentals industry, and here for those in the Internet industry.

CARG shares were unchanged in after-hours trading Tuesday. Year-to-date, CARG has declined -4.25%, versus a 21.57% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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