October 14, 2015 - 2:09pm EST by
2015 2016
Price: 6.26 EPS -0.11 -0.25
Shares Out. (in M): 82 P/E NM NM
Market Cap (in $M): 513 P/FCF NM NM
Net Debt (in $M): -100 EBIT -10 -25
Borrow Cost: Available 0-15% cost

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Truecar (TRUE) has a flawed business model and is quickly running out of room for its growth plans.  While the company's stock has already taken a sharp hit, analyst expectations for 20% growth in 2016 and 2017 are ludicrous and the company will continue to lose money as its revenue stream flatlines and / or declines over the next few years.

The Truecar premise and value proposition for customers is well meaning.  On its website, a consumer can search for a make and model of a car he or she would like to buy, and then Truecar shows what recent transaction prices for that car have been like in that geographical area.  This transparency is useful for consumers when they go to the car dealerships to shop.  However, Truecar gets paid nothing for this information that it shares.  The way Truecar makes money is that consumers can print out a coupon that they can take to the dealership for a no-haggle price.  Once the sale is made, TRUE then gets paid about $400 from the dealership for the lead.

This model has a few basic flaws.  First of all, the coupon only works for the exact car you picked online, including the exact features, color, etc.  If the dealer does not have that model in inventory, then the consumer cannot use the coupon.  This has led to a lot of frustration on the part of consumers who think they are getting a haggle-free experience and then they cannot use their coupons.  However, Truecar is not so easily shortchanged.  If that consumer buys any car on the lot, even a different brand, then the dealer has to pay TRUE its $400.  In fact, dealers have to pay Truecar its money even if they already had that consumer in their own marketing databases.  This has angered many of the car dealers and has even triggered a number of lawsuits by dealers against Truecar for improper business practices.  In fact, Auto Nation, the country's largest dealership group, recently canceled their contract with Truecar over just this business issue.  I would posit that upsetting the business partners that you rely on for your revenue is not a good idea.

In addition to these flaws in the model, I believe that TRUE is also running out of room to grow its revenue.  The company has publicly stated that the number of dealers it can sell to is about 10,000 out of the 30,000 total dealerships in the US.  The reason for the lower number is that the other dealers overlap geographically.  Currently the number of dealerships TRUE does business with is approaching 10,000.  The largest contributor to the company's revenue growth over the last couple of years has been growth in its dealer network.  As it approaches saturation, that growth lever will disappear.  The other growth factor is same store sales growth, namely growth at existing dealerships.  This was a contributor of about 10% annual growth two years ago, but that has slipped to 3% this year.  

Analysts are forecasting 20% revenue growth next year but I do not see how this is possible when both growth levers are slowing dramatically.  Truecar also operates some white label sites for some partners, the largest of which is a site for USAA.  USAA also happens to be TRUE's largest shareholder with 17% of its stock.  USAA has been selling stock in the open market recently, even at the depressed $6 level.  I do not think this bodes well for the company's prospects.

After last quarter's guide down, CEO Scott Painter stepped down from his post, seemingly with a push from the Board.  Soon thereafter, John Krafcik who was TRUE's President, accepted a job at Google to lead its self-driving car initiative.  This leadership vacuum could not have come at a worse time for the company given its issues with its dealers and its impending growth slowdown.

While the stock has been battered, I think there is at least 35% more downside from these levels which would give the company an EV / Revenue multiple of 1x.  If the wheels really come off the bus, there is not much support to the stock as the company is losing money and will be digging into its $100m balance (80% downside to current cash levels).   


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


When the company guides for 2016 on its Q4 earnings call, that will give a good indication of who is right here, the analysts or the short sellers.

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