Here’s why the Carsales.Com Ltd share price is sinking today

Source: Wikipedia Commons

The shares of Carsales.Com Ltd (ASX: CAR) have plunged in early trade following the release of its annual general meeting presentation. At the time of writing its share price has dropped lower by over 4.5% to $11.02.

In the presentation management advised that its Financial and Related Services segment has continued to struggle.

Volume capacity reductions that were experienced in the fourth quarter of FY 2016 have persisted, leading management to believe that first half revenue and EBITDA in the segment will be substantially lower than the first half of FY 2016.

Whilst the Financial and Related Services segment isn’t the company’s biggest segment, it does contribute around 18% of total revenue. With Carsales’ earnings growth already slowing, it cannot afford for any of its segments to underperform.

In FY 2016 Carsales delivered reported net profit after tax growth of just 6%. With its shares changing hands at 25x full year earnings, it is hard to justify such a premium.

The only thing keeping its shares at this level in my opinion is its international growth prospects. Carsales operates in a growing number of international markets. If it can replicate its domestic success in these markets then the company and its shareholders stand to benefit greatly.

International revenue is rising fast, albeit from a very small base. Currently international revenue accounts for just 1.3% of total company revenue. It still has a long way to go before its international operations become a meaningful part of the business.

Although I think Carsales is a great company, I wouldn’t invest in it at the current price. I feel there are far better tech shares on the ASX such as Aconex Ltd (ASX: ACX) and Altium Limited (ASX: ALU) which investors could buy.

It undoubtedly has fantastic international growth prospects, but until I see these operations make a significant contribution to earnings I’m going to sit on the sidelines.

Alternatively these growth shares could be even better investments if you ask me. Each has rapidly growing earnings and even pays a fully franked dividend. Do you own them?

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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