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NewCarSales.com?

NewCarSales.com?

Carsales.com (ASX: CAR) is the leading marketplace for used car sales in Australia, but can it dominate the new car space?

We estimate that a third of used car sales are made via Carsales.com, but the site only accounts for a few per cent of the 900,000 new passenger vehicles and SUVs sold each year. This is a meaningful revenue stream that Carsales.com is missing out on, and management considers that current new car inventory on the site is only 20-30 per cent of their desired medium-term objective.

At this stage we are not confident that Carsales.com will become known for new cars. Car manufacturers want to exercise as much control over new car sales and their brand as they can, and this is one of the reasons many removed their listings from Carsales.com in 2013. What’s more, while a new car buyer is likely to begin their search on Carsales.com, it will typically be to collect research before visiting a dealer to negotiate the transaction.

Carsales.com does not need to compete directly in the new car market in order to achieve meaningful growth over the long-term. The site is an indirect beneficiary of new car sales for one very important reason – the trade-in. While car manufacturers can control the price and the promotion of their new cars, most customers that walk into dealerships are not interested in leaving with their old car.

Due to intensifying competition and increasing price transparency, the sale of the trade-in vehicle has become an integral part of a dealer’s profit margin. As Carsales.com controls most of the industry data and commands the largest used car audience in Australia, dealers begrudgingly pay the premium to clear the used car on the site.

Of course, there is only so much margin that dealers can give away, which means that Carsales.com can increase fees modestly each year but it is unlikely to extract a more meaningful share of value from the industry. It is for this reason that we have remained patient with our target entry price for the company.

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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