Cars.com Inc. (CARS)

Executive Summary / Key Takeaways

• AI-Powered Platform Transformation: Cars.com is evolving from a legacy listings marketplace into a vertically integrated automotive commerce platform, with its Carson AI search assistant driving 2x lead conversion rates and the new DealerClub wholesale auction platform positioning the company to capture a $100M+ revenue stream from the $10 billion dealer-to-dealer market.

• Operational Resilience Despite Macro Headwinds: Dealer count reached a three-year high of 19,526 in Q3 2025, while disciplined cost management delivered 30.1% Adjusted EBITDA margins and $55 million in EBITDA (+7% year-over-year) despite tariff pressures and volatile OEM advertising spend.

• Wholesale Market Inflection Point: The $25 million DealerClub acquisition creates a reputation-based digital auction integrated with AccuTrade's valuation algorithms, enabling one-click appraisal-to-auction workflows that could generate a nine-figure revenue stream by capturing just 1% of wholesale transactions.

• Valuation Disconnect: Trading at 7.6x EV/EBITDA and 6.6x price-to-free-cash-flow with a 4.2% free cash flow yield, the market underappreciates the platform's expanding moat and multiple expansion potential as AI monetization and wholesale penetration accelerate.

• Critical Execution Variables: Success hinges on scaling DealerClub beyond its Southeast launch market while maintaining 30%+ EBITDA margins, and converting Carson's 15% search adoption into measurable ARPD expansion despite competitive pressure from CarGurus and horizontal tech giants.

Setting the Scene: The Automotive Commerce Platform Emerges

Cars.com Inc., founded in 1998 and headquartered in Chicago, Illinois, began as a simple online marketplace connecting car shoppers with dealers. The company has since evolved into an audience-driven technology platform that captures value across the entire vehicle lifecycle. Today, Cars.com generates revenue through three primary streams: Dealer revenue (89% of total), which encompasses the flagship marketplace, Dealer Inspire and D2C Media websites, AccuTrade appraisal technology, and media products; OEM and National revenue (9%), derived from advertising sold to manufacturers and associations; and Other revenue (2%) from data licensing and pay-per-lead products.

The automotive digital marketplace industry is structurally fragmented and brutally competitive. Cars.com competes directly with CarGurus , TrueCar , and CarMax's online operations, while facing indirect threats from Google Shopping, Amazon's potential entry, and Carvana's (CVNA) direct-to-consumer model. The industry is undergoing three simultaneous transformations: accelerating digital retail adoption, acute used vehicle scarcity forcing dealers to acquire inventory more efficiently, and the integration of AI into the shopping experience. These shifts create both pressure and opportunity, as traditional advertising models face macro headwinds while new commerce-enabled platforms can capture transaction-based revenue.

Cars.com's strategic response has been to build a vertically integrated platform that owns the consumer journey from initial search through trade-in appraisal and wholesale disposition. The January 2025 acquisition of DealerClub for $25.3 million marked the company's entry into the $10 billion dealer-to-dealer wholesale auction market. This move complements the AccuTrade appraisal technology and creates a closed-loop system where dealers can acquire inventory directly from consumers via AccuTrade and dispose of aging inventory through DealerClub auctions. The platform strategy is designed to reduce dealer reliance on third-party auctions that charge substantial fees, positioning Cars.com as the "toll booth operator" for the digital wholesale market.

Technology, Products, and Strategic Differentiation

The core technology advantage centers on artificial intelligence integration across the entire platform. Carson, the natural language search assistant launched in Q3 2025, now assists 15% of all searches and search refinements. AI users save three times more vehicles, view twice as many listings, and generate double the lead submission rates compared to traditional searchers. This matters because it directly translates to higher conversion for dealers and justifies premium pricing for the platform. Management notes that Cars.com receives double the AI citations of its closest peer across Google AI Overviews and ChatGPT, indicating superior content authority that drives organic traffic.

DealerClub represents the most significant product expansion, creating a reputation-based wholesale auction where dealer ratings ensure transaction transparency. The platform integrates seamlessly with AccuTrade, allowing dealers to push appraisals directly into auctions with a single click. By Q3 2025, active users increased 40% quarter-over-quarter, while transaction volume grew 50% sequentially in Q2. The strategic implication is profound: capturing just 1% of the wholesale market would generate over $100 million in transactional revenue, while the integration creates an Inventory Intelligence Platform (IIP) that predicts time-on-lot and depreciation, enabling optimized acquisition and disposition strategies.

AccuTrade has become essential infrastructure for dealers facing used car scarcity. The service reached 1,150 subscribers in Q3 2025 and surpassed 1 million quarterly appraisals, with top-quartile dealers acquiring nearly 50 cars monthly through service lane channels. Over 50% of vehicles acquired are between one and five years old, the most desirable inventory segment. Eight OEM endorsements from brands including BMW (BMWYY), Subaru (FUJHY), and Genesis validate the valuation accuracy and create a powerful competitive moat that third-party appraisal tools cannot replicate.

The Dealer Inspire and D2C Media website business, serving nearly 7,900 subscribers, provides a captive channel for deploying AI technology directly onto dealer websites. This five-year growth streak in website subscriptions creates a sticky, high-margin revenue stream while enabling Cars.com to index dealer content in large language models, further enhancing AI-driven traffic acquisition. The completed migration of all legacy preferred customers to new Premium and Premium Plus packages by October 2025, with minimal cancellations, demonstrates successful pricing power realization.

Financial Performance & Segment Dynamics

Q3 2025 results validate the platform strategy's resilience. Total revenue of $181.6 million grew 1% year-over-year, with Dealer revenue increasing 2% to $162 million despite macro pressures. The 30.1% Adjusted EBITDA margin represents a 7% year-over-year increase in absolute EBITDA dollars, achieved through disciplined cost management that offset new DealerClub expenses and modestly higher marketing spend. This margin expansion while investing in new growth vectors signals operational leverage in the platform model.

Segment performance reveals a tale of two businesses. The Dealer segment's 2% growth was driven by marketplace repackaging and a three-year high dealer count of 19,526, offsetting pressure on media products. The 1% year-over-year decline in ARPD to $2,460 reflects customer mix shifts toward faster-growing independent dealers, but the 1% quarter-over-quarter increase signals that repackaging is beginning to drive pricing recovery. OEM and National revenue declined 5% due to two OEM partners temporarily reducing spend for internal reasons unrelated to performance, highlighting the discretionary nature of manufacturer advertising but also demonstrating that these customers remain on the platform.

Cash generation remains robust, with $58.3 million in quarterly free cash flow and $149.5 million on a trailing twelve-month basis. The asset-light model produces a 4.2% free cash flow yield at current valuation, providing downside protection. Liquidity stands at $350 million ($55 million cash plus $295 million revolver availability), against $455 million in total debt, with a net leverage ratio that management considers conservative and within its target range of 2-2.5x. This financial flexibility supports the $250 million share repurchase program, with $63.9 million executed year-to-date at an average price of $12.39, signaling management's view that the stock is undervalued.

The nine-month performance shows the macro impact more clearly. Dealer revenue was flat year-over-year due to marketplace softness in the first half and lower average dealer counts early in 2025, while OEM revenue grew 2% overall despite Q3 weakness. This pattern confirms management's guidance that growth would be back-half weighted, with repackaging benefits and DealerClub integration accelerating in the second half.

Outlook, Management Guidance, and Execution Risk

Management has consistently guided for low single-digit revenue growth in the second half of 2025, reaffirming this outlook in Q3. The guidance assumes stable macroeconomic conditions and relies on continued execution of three growth initiatives: expanding dealer count, driving product adoption, and completing marketplace and website repackaging. The full-year Adjusted EBITDA margin target of 29-31% reflects confidence that high contribution margins from pricing initiatives and revenue growth will offset any macro headwinds.

The critical execution variable is DealerClub's geographic expansion. Currently focused on the Southeast, the platform must scale nationally to capture the $100 million revenue opportunity management has outlined. The integration milestones achieved in 2025—single-click AccuTrade appraisal pushes and direct Marketplace-to-DealerClub connectivity—create the technical foundation for this expansion. However, building network effects in wholesale requires critical mass on both buyer and seller sides, a challenge that will test sales execution in 2026.

AI monetization represents the second key variable. While Carson's 15% adoption rate and 2x conversion improvement are impressive, the financial impact has not yet materialized in ARPD growth. The repackaging into Premium and Premium Plus packages, now 100% complete, embeds AI features into higher-priced tiers. Whether dealers will pay incrementally for these capabilities or view them as table stakes will determine if AI drives pricing power or merely maintains competitiveness against CarGurus' similar investments.

OEM spending volatility remains a wildcard. The Q3 decline was attributed to internal agency changes at two manufacturers, but broader industry trends show OEMs preferring month-to-month commitments over long-term upfronts due to reduced visibility. Management expects ad spending may fluctuate through year-end, creating potential revenue variability that could pressure margins if not offset by faster growth in the more stable Dealer segment.

Risks and Asymmetries

The most material risk to the thesis is competitive pressure from horizontal technology platforms. Google Shopping for cars and Amazon's (AMZN) potential marketplace entry could siphon consumer traffic through superior search dominance or integrated commerce capabilities. Cars.com's moat relies on its specialized automotive ontology and dealer relationships, but if consumers migrate to horizontal platforms for convenience, dealer advertising dollars will follow. This would erode both marketplace revenue and the data foundation for AI improvements, creating a vicious cycle of declining engagement.

DealerClub execution risk cuts both ways. Failure to scale beyond the Southeast would limit the wholesale opportunity to a niche product, capping the $100 million revenue potential. Conversely, successful national expansion could accelerate network effects, making DealerClub the default wholesale channel and creating a high-margin transactional revenue stream that transforms the business model from advertising-dependent to commerce-enabled. The performance-based consideration of up to $88 million through 2028 aligns incentives but also signals that the full value is not yet proven.

OEM spending concentration presents a structural vulnerability. Two customers accounted for nearly all of the Q3 OEM revenue decline, and while both remain advertisers, their internal issues highlight the discretionary nature of manufacturer marketing budgets. In a severe downturn, these budgets could be cut more deeply than dealer subscriptions, which are viewed as essential for inventory turnover. This asymmetry favors the Dealer segment's stability but exposes the higher-margin OEM business to volatility.

The AI arms race with CarGurus creates a "spend or fall behind" dynamic. CarGurus grew Marketplace revenue 14% year-over-year in Q3, faster than Cars.com's overall growth, and maintains higher EBITDA margins (33% vs 30.1%). If Cars.com's AI investments merely match competitor capabilities rather than differentiate, the return on investment will be captured by dealers as cost savings rather than by Cars.com as pricing power, compressing long-term margins.

Valuation Context

Trading at $12.77 per share, Cars.com carries a market capitalization of $785 million and an enterprise value of $1.20 billion. The stock trades at 7.6x trailing EV/EBITDA and 6.6x price-to-free-cash-flow, generating a 4.2% free cash flow yield that provides a floor for valuation. These multiples represent a significant discount to direct competitor CarGurus , which trades at 16.9x EV/EBITDA and 4.1x EV/Revenue, despite Cars.com's comparable dealer count and superior AI citation metrics.

The valuation gap appears most pronounced when considering the wholesale market opportunity. DealerClub's potential to generate $100 million in revenue from 1% wholesale market share would represent a 55% increase to current quarterly revenue run-rates. If successful, this would likely warrant a multiple re-rating toward CarGurus' levels, implying 100%+ upside potential. The balance sheet supports this expansion, with net leverage within target and $350 million in total liquidity providing firepower for organic investment or complementary acquisitions.

Peer comparisons highlight Cars.com's operational efficiency relative to its scale. TrueCar (TRUE) trades at just 0.5x EV/Revenue with negative EBITDA margins, reflecting its shrinking dealer base and existential challenges. CarMax (KMX) commands 22.1x EV/EBITDA but operates a capital-intensive retail model with 2.1% operating margins, making Cars.com's asset-light, 9.3% operating margin profile more attractive for growth investors. The 1.45 beta indicates higher volatility than the market, but this is offset by the 4.2% FCF yield that provides downside protection in uncertain macro environments.

Conclusion

Cars.com is executing a strategic transformation from automotive advertising marketplace to AI-powered commerce platform, with the DealerClub acquisition creating a tangible path to nine-figure revenue growth in the $10 billion wholesale market. The company's resilience is evident in its three-year high dealer count of 19,526 and 30% EBITDA margins despite macro headwinds, while AI innovations like Carson deliver measurable conversion improvements that defend against horizontal tech giants.

The investment thesis hinges on two execution variables: scaling DealerClub nationally to capture wholesale network effects, and converting AI-driven conversion gains into ARPD expansion through premium packaging. Success on either front would likely drive multiple expansion from current levels of 7.6x EV/EBITDA toward CarGurus' (CARG) 16.9x multiple, while failure would still leave investors with a cash-generative business yielding 4.2% in free cash flow. With $350 million in liquidity, conservative leverage, and a $250 million share repurchase program demonstrating management's conviction, the risk/reward profile at $12.77 per share favors long-term investors who recognize that the market is pricing Cars.com as a legacy classifieds business rather than an emerging automotive commerce platform.