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Is Carsales.Com Ltd (ASX:CAR) under threat from Facebook, Inc.?

News that Facebook, Inc. has launched its new auto advertising service in Australia isn’t worrying investors in Carsales.Com Ltd (ASX: CAR) too much but the market may be underestimating the risk.

The Carsales share price is bouncing from yesterday’s more than one-year low of $11.54 with a 0.9% gain during lunchtime trade to $11.64 when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is crashing 1.6% into the red.

Facebook’s Marketplace Autos allows car dealers to list their vehicles on the social media platform but the dealers have to use one of Facebook’s partners to advertise on the platform.

These partners include Carsales.Com as well as some of its rivals like Drive Network and Autotrader Australia.

It looks like our largest online vehicle classifieds company is a partner to Facebook as opposed to a rival and that may be giving investors some comfort.

Even UBS has brushed off the threat and thinks Facebook will only have a minor impact on Carsales.Com’s earnings for a few reasons.

This includes the fact that Marketplace Autos will not have the same number of cars for sale on Facebook, Facebook users will need to navigate to the Marketplace Autos section to view the vehicles, aggregators like Facebook lack the in-depth information on vehicles that Carsales.Com has access to and leads generated through Facebook will probably be of lower quality than those from Carsales.Com.

Coincidentally, I had the chance to chat with one of the founders of CarSwap, Cyrus Rafizadeh, several weeks ago. CarSwap’s app is designed like Tinder to connect buyers to sellers.

He said one of the biggest gripes car dealers have about Carsales.Com is the poor quality of leads coming from the site as the company doesn’t attempt to screen enquiries (Carsales.Com charges car dealers for every lead so maybe it doesn’t have an incentive to).

Another weakness for Carsales.Com is the poor engagement rate on its website as it isn’t “social” enough.

Advertisers using Instagram and Facebook will know the value of having “likes” and comments on posts as the conversion rate tends to correlate with the engagement rate.

CarSwap believes this will give it the opportunity to gain ground against the dominant player.

Having the partnership with Facebook could help address the engagement issue for Carsales.Com, assuming that the online advertising trend is heading towards social media and away from static listings.

Perhaps Carsales.Com’s tie-up with Facebook is an admission that engagement rates is its Achilles’ heel.

But this also raises the question of whether Facebook will try to get a much bigger slice of the pie themselves if the model is so successful.

Carsales.Com is already the biggest underperformer when compared to other leading online classifieds stocks as its shares are down 15% over the past year.

In contrast, the SEEK Limited (ASX: SEK) share price is 6% in the red while REA Group Limited’s (ASX: REA) share price is down less than 2% over the same period.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK Limited. 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 Scott Phillips.

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