Executive Summary / Key Takeaways

• CarGurus is strategically transforming from a leading online marketplace into a comprehensive transaction-enabled platform, leveraging its extensive data moat and AI capabilities to deepen integration with dealers and enhance the consumer journey.
• The core U.S. Marketplace segment continues to demonstrate robust growth, with Q1 2025 revenue increasing 13% year-over-year, driven by strong dealer additions, QARSD expansion through product adoption and tier upgrades, and resurgent OEM advertising.
• Significant investments in technology, particularly AI-driven tools for both consumers (conversational search, personalization) and dealers (data insights like Next Best Deal Rating, Maximize Margin), are yielding quantifiable benefits in engagement, lead quality, and dealer operational efficiency.
• The Digital Wholesale segment (CarOffer) faces ongoing challenges, with Q1 2025 transaction volumes down 49% year-over-year, leading to a revenue decline; management has initiated a strategic assessment to identify a more sustainable and profitable model for this segment.
• Despite wholesale headwinds, strong performance in the high-margin Marketplace segment and disciplined cost management are driving significant Adjusted EBITDA growth (up 32% year-over-year in Q1 2025) and margin expansion, supporting planned investments in marketing and international growth.

Setting the Scene: From Marketplace Leader to Transaction Enabler

CarGurus, Inc. has evolved significantly since its founding nearly two decades ago. Initially establishing itself as a disruptor in the online automotive marketplace by emphasizing trust, transparency, and competitive pricing through innovations like Instant Market Value (IMV) and deal ratings, the company built a formidable platform connecting car buyers and sellers. This foundation, rooted in proprietary technology, search algorithms, and data analytics, propelled CarGurus to a position of market leadership, particularly in the U.S. used car segment.

Today, CarGurus is actively pursuing a strategic transformation, aiming to become a comprehensive, transaction-enabled platform that spans the entire vehicle lifecycle – from shopping and financing for consumers to sourcing, pricing, marketing, and selling for dealers. This evolution is built upon three core value creation drivers for 2025: expanding data-driven solutions across dealer workflows, meeting the evolving needs of car shoppers through intelligent and seamless experiences, and enabling more of the transaction process to occur online.

Central to this strategy is the company's deep data moat and increasing reliance on Artificial Intelligence. CarGurus possesses an industry-leading collection of retail data and consumer insights, which it is actively leveraging to develop predictive analytics and actionable recommendations. This technological differentiation is not merely about enhancing existing products but creating new avenues for growth and embedding the platform more deeply into the daily operations of dealerships and the shopping journey of consumers.

The company operates primarily through two reportable segments: the dominant U.S. Marketplace and the developing Digital Wholesale segment, alongside a growing International Marketplace business. While the Marketplace segment continues to be the engine of growth and profitability, the strategic vision necessitates integrating capabilities across these areas to offer a truly end-to-end solution.

Competitive Arena: Leveraging Data and Audience in a Crowded Market

The online automotive marketplace is a competitive landscape, featuring established players like Cars.com (CARS), TrueCar (TRUE), and the motors segment of eBay (EBAY), as well as disruptive direct-to-consumer models like Carvana (CVNA). CarGurus distinguishes itself primarily through its market-leading audience size and engagement, coupled with its increasingly sophisticated data analytics and AI capabilities.

CarGurus consistently ranks as the most visited listing site, boasting 60% more traffic than its closest competitor in Q1 2025. This audience leadership provides a significant draw for dealers seeking exposure to in-market shoppers. Furthermore, the company's data suggests a unique audience, with a substantial portion of its monthly unique visitors not visiting leading competitor websites. This unique reach enhances the value proposition for dealers, particularly larger, more sophisticated groups who are increasingly consolidating their advertising spend towards high-yielding platforms.

While competitors like Cars.com have a strong established dealer network and TrueCar focuses on pricing transparency, CarGurus is strategically using its data moat to offer differentiated insights. Tools like Next Best Deal Rating, Maximize Margin, and Acquisition Insights leverage CarGurus' vast consumer demand data to provide dealers with predictive analytics that directly impact their profitability and inventory management. This contrasts with competitors who may offer more traditional listing or lead generation services. For instance, dealers using Maximize Margin have seen average listing prices increase by $747, with nearly half of those vehicles still turning within two weeks, demonstrating a tangible benefit derived from data-driven pricing.

The potential entry of large tech players like Amazon (AMZN) into the automotive space, while currently focused on new cars and acknowledged as a risk, highlights the industry's digital shift. However, CarGurus' established trust and deep integrations within the complex used car dealer ecosystem, built over two decades, represent a significant barrier to entry and a competitive strength in this less structured market segment.

Financially, CarGurus' Marketplace segment exhibits strong gross margins (around 93%), comparable to or exceeding those of its marketplace competitors like Cars.com (83% TTM) and eBay (72% TTM), and significantly higher than transaction-focused models like Carvana (21% TTM). While Carvana has shown explosive revenue growth, CarGurus' Marketplace growth (13% YoY in Q1 2025) is robust and achieved with superior profitability and lower debt levels compared to Carvana (CARG Debt/Equity 0.49 TTM vs CVNA 4.80 TTM). This financial health provides CarGurus with the flexibility to invest heavily in R&D and strategic initiatives, further widening its competitive moat.

Performance and Operational Momentum

CarGurus delivered a solid start to 2025, with Q1 total revenue reaching $225.2 million, a 4% increase year-over-year. This growth was entirely fueled by the strength of the core Marketplace segment, which saw revenue climb 13% to $212.2 million. This performance was driven by a combination of factors:

• Dealer Growth: The company added nearly 1,200 net new global dealers year-over-year, including 734 in the U.S., marking the highest U.S. dealer growth since pre-pandemic levels.
• QARSD Expansion: U.S. QARSD grew 10% year-over-year to $7,369, reflecting new dealers joining at market rates, successful upsells to higher subscription tiers, and increased adoption of value-added products like Highlight (adoption up 32% with VIN-level targeting, leading to 115% increase in average leads per day for optimized listings).
• OEM Advertising: This segment continued its double-digit year-over-year growth trend, supported by strong annual upfront commitments, indicating recovering new car supply and the value OEMs place on CarGurus' audience.
• International Momentum: The International segment (primarily UK and Canada) saw revenue increase 20% year-over-year to $17.0 million, with International QARSD up 10%. Steady traffic growth and double-digit lead growth underscore market share gains in these regions.

This strong Marketplace performance significantly bolstered profitability. Consolidated gross profit rose to $199.7 million, resulting in an impressive gross margin of 89%, up from 81% in Q1 2024. This margin expansion is primarily a result of the favorable revenue mix shift towards the high-margin Marketplace business. Consolidated Adjusted EBITDA grew 32% year-over-year to $66.3 million, achieving a margin of 29%, a 610 basis point improvement from the prior year. This demonstrates significant operating leverage on the company's fixed cost base.

However, the Digital Wholesale segment continues to face headwinds. Revenue declined 55% year-over-year to $12.9 million in Q1 2025, primarily due to a 49% decrease in Transactions processed on the CarOffer platform (5,209 in Q1 2025 vs 10,302 in Q1 2024). This segment reported an Adjusted EBITDA loss of approximately $3.2 million. Management acknowledges that the CarOffer platform's current structure lacks the flexibility needed for rapidly shifting market conditions and requires broader automation. A strategic assessment is underway to determine a more sustainable and profitable path for this business, potentially focusing more on leveraging insights and becoming more seller-focused, rather than building a "me-too" auction capability.

Operating expenses increased modestly year-over-year, primarily driven by seasonally higher sales and marketing spend, including investments in brand awareness campaigns like the "Big Deal" initiative launched in February 2025. Product, technology, and development expenses also saw a slight increase as the company continues to invest in innovation, particularly in AI and integrating capabilities across the platform.

Liquidity remains strong, with $172.9 million in cash and cash equivalents as of March 31, 2025. The company also has access to a $400 million revolving credit facility, with $390.1 million available, providing ample flexibility. Share repurchase activity continues under the $200 million 2025 program, with $182.8 million repurchased in Q1 2025, reflecting a commitment to returning value to shareholders.

Strategic Initiatives and Technological Edge

CarGurus' strategic focus is deeply intertwined with its technological capabilities, particularly its data analytics and AI. The company is actively developing and deploying tools that leverage its unique data moat to create tangible value for both consumers and dealers:

• AI-Powered Consumer Experience: Initiatives like CarGurus.com/discover, a conversational search AI, are designed to engage shoppers earlier in the funnel. Users interacting with this feature spend two times more time on site, indicating deeper engagement. AI is also being used for personalized recommendations and comparison pages, driving higher lead conversion (10% increase in testing) and VDP views (2x more likely). The mobile app, accounting for over 30% of leads and seeing 25% year-over-year MAU growth, is a key channel for these enhanced experiences.
• Data-Driven Dealer Insights: The company is expanding its suite of Dealer Data Insights (DDI) tools. Next Best Deal Rating is now used by over 17,000 dealers globally, with 74% taking action on pricing recommendations in Q1. Maximize Margin usage is growing rapidly (up 64% QOQ), helping dealers increase prices on high-demand vehicles. These tools, backed by the "industry's largest retail data and consumer insights moat," empower dealers with actionable recommendations across their workflow, from pricing to acquisition.
• Digital Transaction Enablement: Digital Deal, supporting over 11,000 dealers globally, is integrating credit applications directly into dealer systems (adopted by 1,100 dealers in Q1), streamlining the financing process and providing dealers with more qualified leads (over 25% of email leads now come from Digital Deal). Top Dealer Offers is expanding (500 dealers in 80 metros), enabling dealers to source consumer inventory directly, leveraging the fact that many consumers selling a car are also looking to buy.

These initiatives are supported by investments in the underlying technology platform, including capitalized website development costs ($5.4 million in Q1 2025) and internal-use software. The strategic intent is to embed CarGurus deeper into the dealer workflow, moving beyond just lead provision to becoming a critical partner in their operational and financial success.

Outlook and Risks

CarGurus' guidance for Q2 2025 reflects continued confidence in the core business and a commitment to investment. Total revenue is projected between $222 million and $242 million, representing 2% to 11% year-over-year growth. Marketplace revenue is expected to drive this, guided between $219.5 million and $224.5 million, up 12% to 15% year-over-year. This indicates sustained double-digit growth despite increasingly difficult comparisons.

Adjusted EBITDA is guided between $71.5 million and $79.5 million, representing 29% to 43% year-over-year growth. The midpoint implies an elevated Q2 adjusted EBITDA margin, driven by strong growth and deliberate pacing of marketing investments. Management explicitly states they are choosing to reinvest behind current momentum, particularly in marketing and international product innovation, which may moderate sequential margin expansion trends seen previously, though annualized margin expansion is still expected in 2025 relative to 2024.

Digital Wholesale volumes are expected to decrease sequentially in Q2, with segment EBITDA losses projected to be relatively flat as lower volumes are offset by lower operating expenses. Management is more positive about the full-year growth outlook, anticipating exiting 2025 at a low double-digit year-over-year growth rate, although market conditions could influence this.

Key risks to this outlook include macroeconomic volatility, particularly rising interest rates and inflation, which can negatively impact consumer demand and vehicle affordability. Changes in international trade policies, such as tariffs, could increase vehicle costs and further depress demand, although management notes the situation is fluid and sophisticated dealers may lean into platforms like CarGurus for efficiency in uncertain times. The ongoing challenges and strategic assessment within the Digital Wholesale segment represent a specific operational and financial risk, with the potential for future impairment charges if performance does not improve. Litigation and tax contingencies are also noted as potential risks.

Conclusion

CarGurus is executing a strategic transformation built upon the strength of its market-leading Marketplace business and a growing arsenal of data-driven and AI-powered tools. The company's ability to attract and engage a large, unique consumer audience and translate those insights into valuable, actionable tools for dealers is driving robust growth and profitability in its core segment. While the Digital Wholesale business presents a notable challenge requiring strategic reassessment, the success in the high-margin Marketplace segment provides the financial flexibility to invest in innovation, international expansion, and brand building.

The investment thesis for CarGurus hinges on its continued ability to leverage its data moat and technological edge to deepen its integration into the automotive ecosystem, making its platform indispensable for both consumers and dealers. The strong Q1 performance and positive outlook for the core business, coupled with disciplined capital allocation (including share repurchases), underscore the momentum. Investors should monitor the progress of the Digital Wholesale strategic assessment, the impact of macroeconomic conditions on consumer demand, and the effectiveness of the company's investments in driving sustained market share gains and operational efficiency across its integrated platform.