Although Cars.com (currently trading at $11.83 per share) has gained 9.5% over the last six months, it has trailed the S&P 500’s 34.7% return during that period. This may have investors wondering how to approach the situation.
Is now the time to buy Cars.com, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Is Cars.com Not Exciting?
We're swiping left on Cars.com for now. 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 19,412. 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%, a slight deceleration versus This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Cars.com, its EPS declined by 1.8% annually over the last three years while its revenue grew by 4.1%. 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 isn’t one of our picks. With its shares lagging the market recently, the stock trades at 3.5× forward EV/EBITDA (or $11.83 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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