With the constant barrage of attacks that the consumer economy absorbed since the start of the COVID-19 crisis, it’s an accomplishment that TrueCar (TRUE) – an automotive pricing and information website for new and used car buyers – managed to print a positive return so far this year. Unfortunately, TRUE stock suffered a hefty blow on Tuesday, which might undermine the aforementioned achievement.
To be sure, momentum technically remains optimistic for TRUE stock. In the trailing one-month period, shares gained almost 20% of equity value. For the year, they’re up 1.58%. However, the sharp fall of nearly 5% on the May 9 session following a not-so-encouraging earnings report for the first quarter has many investors rushing for the exits. Unless economic circumstances improve, more people may decide to call it a day.
TRUE Stocks Slips Following Q1 Loss and Lagging Revenue Estimates
According to Zacks Equity Research, TrueCar “came out with a quarterly loss of $0.16 per share versus the Zacks Consensus Estimate of a loss of $0.15. This compares to loss of $0.08 per share a year ago. These figures are adjusted for non-recurring items.”
Zacks continued, noting that “[t]his quarterly report represents an earnings surprise of -6.67%. A quarter ago, it was expected that this provider of localized information on new car costs would post a loss of $0.14 per share when it actually produced a loss of $0.17, delivering a surprise of -21.43%.”
Perhaps most damagingly, TrueCar “posted revenues of $36.98 million for the quarter ended March 2023, missing the Zacks Consensus Estimate by 8.24%. This compares to year-ago revenues of $43.53 million. The company has not been able to beat consensus revenue estimates over the last four quarters.”
To be fair, not every bit of data pointed in the wrong direction. Most notably, the count of average monthly unique visitors reached 8.7 million in Q1 of this year, 19% higher than the 7.3 million posted in Q1 2022.
Also, while revenue in the most recent quarter disappointed at just under $37 million, it did represent a modest lift of 0.8% from the $36.7 million tally posted in Q4 2022. Put another way, the sales trend may have found a stabilization point.
Still, that might not be reason enough for contrarian investors to pile into TRUE stock.
Pricing Pressures Work Against Comparatively Stagnant Wages
Perhaps the biggest challenge facing TRUE stock moving forward is the viability of the consumer economy. Fundamentally, the purchasing power of households faced myriad attacks: the COVID-19 crisis, blisteringly high inflation, geopolitical flashpoints unsettling several markets and of course, ever-rising interest rates. However, for TrueCar, wages just aren’t keeping pace with accelerating prices on dealership lots.
According to TrueCar’s Q1 stockholder letter, the average list price of new vehicles jumped to $50,129 in March of this year. This marker represents a 10.3% lift from the $45,431 list price posted one year prior. And it’s a gargantuan leap of nearly 38% from the $36,369 list price seen two years ago.
With inflation, of course, rates tend to move higher across the board, including wages. However, the magnitude of increase may be shockingly discrepant. For example, data from the U.S. Bureau of Labor Statistics reveals that in March 2023, the average hourly earnings of all employees hit $33.20. One year prior, this stat was $31.83 (or a 4.3% year-over-year increase). Two years ago, the average hourly wage was $30.05 (or 10.5% up).
As you can clearly see, the growth in the price of new cars grossly outpaces the rise in wages, crimping consumers. To be fair, the average list price of used vehicles in March 2023 sat at $30,847, down 7.6% from one year earlier and up 23% from two years ago. However, the average APR for used vehicles right now stands at a whopping 11.1%. One year ago, it was only 8%.
Therefore, no matter where consumers turn in the automotive market, they’re facing a tough environment.
Fading Relevance Works Against TrueCar
Essentially, TrueCar suffers from a relevancy crisis. On the new car front, accelerating prices simply outpace wages, thus reducing the total addressable market for the industry. However, on the used-car aisle, higher financing costs crimp affordability. Therefore, without a significant recovery in the consumer economy, TRUE stock may struggle.
To be sure, vehicles like anything else eventually fail, requiring replacement. And that could boost overall industry demand. However, with the supply shortage (particularly of desirable cars) impacting the dealership dynamic – basically the fading of negotiations – TrueCar may find itself without a remarkably viable business model. Therefore, investors should be cautious about TRUE stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
