We recently compiled a list of the 7 Best Small Cap Automotive Stocks to Buy. In this article, we are going to take a look at where Cars.com, Inc. (NYSE:CARS) stands against the other small cap automotive stocks.
The International Automotive Industry
The automotive industry is one of the fastest-growing industries, especially with the recent surge in demand for Electric Vehicles (EVs) across the globe. According to a report published by Fintech Futures, the global automotive industry was valued at $4.4 trillion in 2024. The market is expected to grow at a compound annual growth rate of 5.66% to reach $6.7 trillion by 2032. The recent trend of EVs, autonomous vehicles, and innovative technology has revolutionized the automotive sector. The transformation is expected to boost auto revenues by nearly 30% during the projected period.
The international automotive industry market share has been changing drastically during the year. According to a CNBC report published on June 14, Chinese automakers have overtaken the US in terms of sales for the first time. Chinese automakers, led by BYD, sold 13.4 million new vehicles in 2023 surpassing 11.9 million vehicles sold by their US counterparts. On the other hand, the Japanese automotive industry stood undefeated by selling 23.59 million new vehicles during the same year. Moreover, China’s sales growth also outperformed that of the US. The country grew its automotive sales by 23% during the year as compared to a 9% growth by the US.
China has been focusing on growing its exports of the automotive industry to capture the international market. According to another CNBC report published on June 27 Chinese automakers are expected to achieve 33% of the global automotive market share by 2030. As of 2024, China has already captured 21% market share and sales of automobiles outside of China are expected to grow from 3 million this year to 9 million by 2030. Currently, around 59% of Chinese automotive sales come from within the country, with Russia being the largest market for Chinese automotive at 33%. If you want to read more about automotive industry trends you can look at the Top 18 Automotive Industry Innovations and Trends.
The US Automotive Industry Outlook
The United States is one of the key players in the international market. According to a report by Alliance for Automotive Innovation, the sales of new vehicles in the month of June dropped 3.4% year-over-year amounting to 1.32 million. The slow down in the sales is mainly attributed to higher prices and interest rates that hinder a stronger market. However, the full year sales estimates look better, with new vehicle sales expected to reach 16.1 million during the year, indicating a 12.4% increase from last year. On the other hand, on June 25 Reuters reported that uncertainty looms in the US automotive industry as the upcoming elections are expected to reshape the US economy. Cox Automotive reiterated its full year 2024 guidance at 15.7 million units.
The US consumer market has been reluctant to purchase vehicles due to inflation, and some shoppers are expected to keep holding back due to election uncertainty. As per Reuters, around 74% consumers and 81% dealers believe that inflation is the top concern and that the election is likely to influence it. This has led to a sell-off in auto stocks and many companies with strong fundamentals are now available at cheaper prices. With that, let’s now look at the 7 best small cap automotive stocks to buy.
Our Methodology
To compile the list of best small cap automotive stocks to buy we used Yahoo Finance and Finviz stock screeners. We set the market cap range between $250 million to $2 billion to get small cap stocks only. We checked auto manufacturers, auto and truck dealerships, and also auto parts for this article. Once we had a consolidated list of small cap automotive stocks, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge funds holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A luxury car dealership’s showroom, representing the automotive industry the company operates in.
Cars.com, Inc. (NYSE:CARS)
Number of Hedge Funds Holders: 15
Cars.com, Inc. (NYSE:CARS) is an audience driven technology company that simplifies the process of buying and selling cars. The company connects consumers with local dealers through its AI-driven car commerce platform and allows users to search, compare, and buy new and used cars. The comprehensive services provided by the platform include Dealer Inspire, AccuTrade, and Media Network services. The Dealer Inspire tool provides digital solutions including website creation, hosting services, and digital retailing to enable its dealer customers to manage their online reputation effectively. AccuTrade technology helps dealers price vehicles accurately and empowers retail profitability. Lastly, the Media Network technology helps dealers and automakers market their cars across various social media platforms. Top customers of the company include local dealers, Original Equipment Manufacturer (OEMs), and advertisers and lenders in the automotive industry of the United States.
The competitive edge of Cars.com, Inc. (NYSE:CARS) lies in its ability to attract high traffic to its platforms that allows dealers to access a large pool of ready to buy customers. The company attracts more than 25 million visitors monthly, which speaks for its brand recognition and strong online presence in the US market. Moreover, the amalgamation of innovative technologies resulting from strategic acquisition of companies like Accu-Trade and CreditIQ, puts Cars.com at a near-monopoly situation in the US automotive industry.
During the fiscal first quarter of 2024, the company grew its top-line by 8% year-over-year, on the back of strong performance across both business segments. The dealers revenue grew 8% year-over-year driven by continued growth in its dealer to consumer (D2C) platform. On the other hand, the OEM and national revenue was up by 13% versus the previous year. Growth in this segment was mainly due to increased OEM investments and increased consumer awareness. Looking at its historical analysis, Cars.com has been able to grow its bottom line by 30% during the last 5 years, indicating the company’s profitability and operational efficiency. Management has also been managing margins and free cash flow effectively. The adjusted EBITDA for the quarter amounted to $53 million, whereas the adjusted EBITDA margin was 29%. Improved EBITDA margins led Cars.com to increase its free cash flow by over $5 million year-over-year to $27 million.
Cars.com, Inc. (NYSE:CARS) is cheap at current levels. It is trading at 10 times this year’s earnings, a 19% discount to its peers. Moreover, its earnings are expected to grow by 100% this year to $0.14.
Overall CARS ranks 6th on our list of the best small cap automotive stocks to buy. You can visit 7 Best Small Cap Automotive Stocks to Buy to see the other small cap automotive stocks that are on hedge funds’ radar. While we acknowledge the potential of CARS to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CARS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.