Carsales.Com Ltd (ASX: CAR) shares have been hit hard by the broad sell-off that affected almost every S&P/ASX 200 (INDEXASX: XJO) company late last year. Carsales shares are down from $16 in August to around $12.50 today.
Fortunately, there are reasons to like Carsales and — at the right price — to consider adding it to a long-term share portfolio.
What Does Carsales Do?
The Carsales website is one of the top 100 websites in Australia, according to Alexa, and it is the out-and-out leader in new and used car advertising. Carsales makes its money by advertising new and used vehicles, selling advertising, integrating with dealer inventory software and by arranging finance for car buyers.
2 Reasons To Like Carsales Shares
1. Dominance.
It’s believed Carsales receives about three times as many website visits as its three closest Australian competitors combined.
However, Facebook Inc (NASDAQ: FB) and Gumtree, part of eBay Inc (NASDAQ: EBAY), are trying to muscle in on Carsales by offering free ads to people looking to sell their cars. These two competitive threats to Carsales are the reasons I have avoided owning shares in the company.
However, Carsales has so far weathered the competition quite well. For some investors, the reason for this is that if you’re selling your car worth $5,000 or $20,000, paying a $50 advertising fee on Carsales is hardly a big deal if it means getting your sale through quickly and securely.
On the dealer side, Carsales is the dominant player, with new sales accounting for the biggest slice of its revenue. What I’ve underestimated about Carsales is how much dealers depend on its analytics, data and traffic. For example, Carsales’ Autogate is Australia’s leading inventory software for car dealers. This is just one example of how Carsales is widening its competitive advantage or moat (something I always look for).
2. Options.
A few years back, Carsales expanded into finance with the idea being that most people buy cars using finance of some type. I think the jury is out on this lower-margin business.
However, the fact that Carsales can expand outside of its core competency and live to tell the tale gives rise to the idea that it’s a strong and cashflow rich business.
Currently, Carsales is growing its complementary services like its tyres websites, boat sales and expanding internationally. This type of optionality can be a free option for patient shareholders.
Are Carsales Shares Worth Buying?
I’m happy to keep Carsales on my watchlist, for now. While its share price has come back a little in recent times it’s not quite cheap enough for me just yet. Plus, I’d like to adopt a wait-and-see approach with regards to Facebook Marketplace, which is a relatively new entrant to the local market.
So while the dividend may be tempting, I’m happy to keep looking for other ideas on the ASX and abroad.
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Disclosure: At the time of publishing, Owen Raszkiewicz owns shares of Facebook Inc.
