Is Carsales.com a buy?

Carsales.com may be about to borrow a growth strategy from ecommerce giant Amazon.

In recent months, Carsales.com (ASX: CRZ) has been looking to expand beyond its core business in Australia, negotiating a 30% stake in Webmotors SA, Brazil’s leading automotive sales site, and purchasing a near 20% stake in iCarAsia (ASX: ICQ).

Now the company is exploring additional growth strategies, which may involve making its technology platform available to Webmotors SA, iCarAsia, and possibly other companies as well “under separate commercial negotiations”.

“Carsales.com is considering offering its technology platform to classified sites globally as it seeks to build on its stakes in overseas counterparts”, as The Australian Financial Review reported this morning.

Borrowing from Amazon

Such a strategy takes a page from Amazon’s book, no pun intended. In recent years, the ecommerce giant has monetized its internally developed platforms by offering extensions of its web infrastructure to other businesses through Amazon Web Services.

Amazon doesn’t break out the results for its Web Services unit individually, so the growth in this unit can be hard to track. However, its “other” sales segment — which includes non-retail activity, from AWS to advertising and co-branded credit cards — has seen significant growth in recent years, with revenues rising from US$953 million in 2010 to US$2.5 billion in 2012. (Amazon’s overall revenues topped US$61 billion in 2012.)

Still, Carsales.com chief exec Ajay Bhatia says the Carsales.com effort may be revenue-neutral: “We don’t intend to make a whole lot of money when we deal with our partners”.

Big multiples on these ASX web stocks

Carsales.com shares are currently trading for 31 times earnings, or nearly 12 times sales, making it among the priciest ASX web companies. By way of comparison, REA Group (ASX: REA), which operates Realestate.com, among other sites, has shares trading for 43 times earnings.

Both companies appear more expensive than Seek Limited (ASX: SEK), operator of employment site Seek.com, at 26 times earnings, and Wotif Holdings (ASX: WTF), operator of hotel and flight booking sites, at 20 times earnings.

The bottom line for investors

It’s true that Carsales.com has good growth prospects going forward — as Mr. Market’s price tag seems to indicate. Yet the current valuation doesn’t leave much room for error, or much in the way of downside protection. A broader market pullback could present a buying opportunity in future, though, offering investors the chance to climb aboard Carsales.com’s international expansion at a more reasonable price.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

 

 

 

 

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