CarGurus — An Unlikely Vertical SaaS Company

CarGurus, the leading global car marketplace, just started trading on the NASDAQ and had a very successful IPO. The company sold $150M of stock at $16.00/share, pricing above the range. The stock was up over 70% after the first close and is now up over 100% from their IPO price. The CarGuru auto marketplace had 77 million average monthly visitors in Q2'17 alone (78% on mobile), the largest car inventory of any U.S. online marketplace with over 5.4M car listings, and an active dealer network of over 40,000 dealers. While CarGurus is an auto marketplace, they derive most of their revenue from their “Marketplace subscription”, which is a SaaS-based listing and display advertising business. In 2016, this product generated 86% of their total revenue.
 
The CarGurus dealer platform is an impressive vertical software business that has dominated the U.S. dealer market. Their S-1 says there are 43,000 dealers in the U.S, while CarGurus has 40,000 in their active dealer network, representing a 93% market share. They have 23,347 paying dealers, owning 54% of the entire market. Converting the rest of the almost 17K dealers will be a large driver of future growth, as well as increasing their ASPs (average selling price). The company plans to add more subscription products to increase ASPs.

CarGurus employs a freemium model for their paid listing/advertising subscription software business and have a few products; Basic Listing, which is free, and Enhance or Featured Listing, which requires paid subscriptions that are paid monthly, quarterly, semiannually, or annually. 17% of customers pay on an annual basis. Dealers also get access to a Dealer Dashboard product for performance summaries, Dealer Insights which manages reviews, and a pricing tool and market analysis tool. The pricing and market analysis tools are only available for paying dealers. Take a look at CarGurus’ implied ARR (annual recurring revenue).

Implied Ending ARR Over Past 10 Quarters ($M)

Note: Implied ending ARR calculated by multiplying quarterly Marketplace subscription revenue by four.

What does CarGurus look like compared to other pure-play SaaS IPOs with regard to ARR ramp? Take a look at the chart below comparing CarGurus to the other enterprise software IPOs of 2017. If their marketplace subscription was a standalone business, it would be the largest and fast-growing from the group. Their average ACV (annual contract value) was $10.8K last quarter, which is up 27% since December 2015. That’s lower than most other public software vendors.

2017 Software IPOs + CarGurus ARR Ramp ($M)

What about compared to a broad group of high-growth software IPOs? I track ~45 in total and CarGurus’ Marketplace subscription business would rank 2nd out of this entire group, and it’s growing 72% YoY. They added $30.4M of net new ARR last quarter, much higher than other SaaS IPOs.

CarGurus ARR Ramp vs Other High-growth Software IPOs ($M)

Note: CarGurus not included in High, Average, Median or Low.

CarGurus has already reached GAAP profitability and had a 10% adjusted EBITDA margin in H1’17, a rare milestone for any high-growth company at IPO (let alone a fast-growing subscription software business). They only raised ~$5M from friends and family and prior to the IPO had $81M of cash on the balance sheet. On average high-growth software companies raise ~$150M prior to IPO and burn through almost $100M.

Other vertical software companies like AspenTech, Blackbaud, Ellie Mae, Tyler Technologies, and Veeva also have high operating margins and tend to be much more resistant to being enveloped by large, horizontal suite vendors. CarGurus has similarly high margins and the added benefit of network effects created by their consumer marketplace. Given the growth and profitability of the business, I expect them to continue on their path of dominating the dealer software market.

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