TrueCar Inc: Why Oversold TRUE Stock Could Double or Triple

TrueCar Inc: Why Oversold TRUE Stock Could Double or Triple
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TrueCar Inc Wants to Change the Way You Car-Shop

The traditional way to shop for a car by visiting multiple dealerships and haggling for the best price will fade with time, and a forward-thinking company like TrueCar Inc (NASDAQ:TRUE) is a good bet on that change.

Say you have a car purchase in mind. Now, instead of venturing to a dealer and debating for hours for the best price, TrueCar employs proprietary data and analytics via a digital platform to enable you to find out what other buyers paid for the same car.

Once the price discovery process is completed, the TrueCar platform allows dealers to send you a discounted price and incentives. In other words, you get the best price without needing to haggle. If you have a trade-in, you can also receive a firm offer price for that vehicle.

TrueCar Inc’s business model makes a lot of sense.

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But some recent operational concerns drove TrueCar stock down to a low of $3.01 in August, well below the initial public offering (IPO) price of $9.00 in May 2014 and the 52-week high of $10.89.

Chart courtesy of StockCharts.com

TRUE stock has rallied by more than 30% over the past month, but it remains down about 50% this year, to the point where I see a great risk/reward opportunity.

Given the extent of the sell-off of TrueCar stock, the upside prospects are significant.

My Argument for TRUE Stock to Double 

A look at the five-year revenue picture shows TrueCar Inc improving in each of the last four years. The revenue compound annual growth rate (CAGR) from 2014 to 2018 was 14.4%.

Fiscal Year Revenue (Millions) Growth
2014 $206.7
2015 $259.8 25.7%
2016 $277.5 6.8%
2017 $323.2 16.5%
2018 $353.6 9.4%

(Source: “TrueCar Inc.MarketWatch, last accessed November 15, 2019.)

A concern, however, is that the revenue growth fell below the CAGR in 2018, and things are looking tenuous.

TrueCar is estimated to report a decline in revenue to $352.2 million this year, before recovering by 4.5% to $367.5 million in 2020. (Source: “TrueCar, Inc. (TRUE),”Yahoo! Finance, last accessed November 15, 2019.)

The company has not yet produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA), nor generally accepted accounting principles (GAAP) profits. Those will be the major sticking points for this stock.

Fiscal Year EBITDA (Millions) Growth
2014 -$33.9
2015 -$39.5 -16.6%
2016 -$10.4 73.7%
2017 -$11.0 -5.5%
2018 -$6.0 45.4%

(Source: MarketWatch, op. cit.)

One piece of good news is that TrueCar narrowed its GAAP earnings-per-share (EPS) loss from 2016 to 2018.

Fiscal Year GAAP Diluted EPS Growth
2014 -$0.68
2015 -$0.79 -16.2%
2016 -$0.49 38.0%
2017 -$0.35 28.6%
2018 -$0.28 20.8%

(Source: MarketWatch, op. cit.)

But TrueCar is struggling to cut costs and deliver profits. The company is expected to report an adjusted loss of $0.06 per diluted share this year and further narrow this to $0.03 in 2020. (Source: Yahoo! Finance, op. cit.)

If we could see a firm pathway to profitability for TrueCar Inc, this could lead to a much higher price for TrueCar stock.

The company will have time to sort things out, given the strong net cash of $128.0 million (around $1.19 per share) on its balance sheet.

TrueCar generated positive free cash flow in 2017 and 2018, but this will likely reverse to negative over the next two years.

Analyst Take

Institutions and insiders love TRUE stock. Over the last six months, insiders bought 814,358 common shares and sold only 12,504 shares. (Source: Yahoo! Finance, op. cit.)

For investors, the key is for TrueCar Inc to grow its business while moving toward profitability and becoming a cash-flow generator.

The massive sell-off of TrueCar shares now affords traders a high-prospects opportunity. A doubling in TrueCar stock would be a reasonable forecast.