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TrueCar Investors Spot Signs of Weakness

It seemed as if investors couldn’t get enough of Santa Monica-based TrueCar (TRUE).

Since its IPO in May of 2014, shares have skyrocketed more than 82.6%. Over that time, the company outpaced the Nasdaq by more than four-to-one!

Shares hit a speed bump in Friday’s trading, however. The stock declined 12.47%, to close at $18.18.

Does the pullback represent a fortuitous buying opportunity, or should investors steer clear?

A Solid Beat

TrueCar claims to make the car-buying process easier on consumers by taking haggling out of the equation.

Essentially, you look up the car you want to buy, and TrueCar will tell you what the average person has paid for said vehicle. It then provides you with a lower “TrueCar Price” and a “Guaranteed Savings Certificate” that you can take to a certified dealer.

More than 6.1 million shares traded hands on Friday. This compares to an average daily volume of 1.1 million shares for the company.

The decline began after the online car-pricing company reported its fourth-quarter and full-year results… even though the report revealed that things are moving in the right direction.

  • For Q4 2014, TrueCar reported total revenue of $55.5 million, a 38.2% improvement over Q4 2013. The company said its Q4 transaction revenue rose to $51.2 million, up 42% over the same quarter in the year-ago period.
  • The company disclosed fourth-quarter EBITDA of $4.3 million, which represents an EBITDA margin of 7.7%. This is an improvement from the company’s Q4 2013 EBITDA of -$300,000.
  • TrueCar also reported break-even earnings for the fourth quarter, beating analysts’ estimates of a loss of $0.01 per share.
  • For the year, TrueCar disclosed that total revenue was $206.6 million, an increase of 54% over FY 2013. It also announced full-year transaction revenue of $189.4 million, 60% higher than its transaction revenue for 2013.
  • The company saw a great improvement in its bottom line for the year by showing a non-GAAP net loss of $3.3 million, or -$0.05 per share. This compares to a loss of $11.9 million, or -$0.20 per share, in FY 2013.
  • And for the first time in its history, the company posted positive operating cash flows for both the fourth quarter and full year.
  • TrueCar said that monthly unique visitors to its website increased 34% to 4.4 million in the quarter.
  • The company ended 2014 with 8,501 new car franchise dealers, which is more than one out of every four dealers in the country – a nearly 30% growth rate over 2013 numbers. When including non-franchise dealers, TrueCar’s network now exceeds 10,000 dealers.
  • TrueCar said the number of automobiles sold in Q4 2014 rose 43% to 163,338 units, while the number of units for all of 2014 jumped by 52.6% to 610,620.
  • The company disclosed that its average transaction value grew to $314 in the fourth quarter, up from $310 in the year-ago quarter.

Now, the solid earnings report might lead investors to believe that the recent dip represents an ultra-timely buying opportunity.

Don’t be fooled!

Truly Overhyped

Even after news that TrueCar has inked a deal to partner with AAA Northern California, Nevada, and Utah to make its 10,000 dealers available to AAA members, shares of TrueCar don’t represent a good “Buy” at these levels.

For two main reasons…

First, the concentration risk remains too high given that TrueCar is so dependent on user traffic from the company’s largest shareholder, the mutual insurer USAA.

Until TrueCar can successfully diversify its traffic stream, the risks of USAA making substantive changes that could materially affect the business will continue to pose a significant threat to the company.

And second, a bullish interpretation of the company’s financials and relevant multiples implies a best-case price for the stock of $20 – a mere 10% premium to Friday’s close.

Of course, the company pays no dividend, making the risk too great to justify picking up any shares after the day’s decline.

In the case of TrueCar, the stock is showroom pretty, but until the price comes down into the low teens, admire it from afar.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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