Motley Fool Australia

3 reasons why Carsales.com should be on your watchlist

Car sales

Vroom! The Carsales.com Ltd (ASX: CAR) share price has zoomed ahead with a year-to-date increase of 14%.

Despite the impending write-down of $48 million for its finance arm, Stratton Finance Group, and a recent report of lower new car sales in 2018, the Carsales.com share price has continued to climb.

I believe that the rise in the Carsales share price could be due to investors looking forward to its future earnings.

If Carsales.com is not yet in your portfolio, here are 3 reasons why I think you should add it onto your watchlist.

1. Win-win

Carsales.com has traditionally been an online platform for car dealers to list their fleet of vehicles for sale.

In recent years, we are seeing more individual car owners putting up their own listings on carsales.com. Some car owners believe that they can fetch a higher selling price through their own listing. Others prefer to have more control over the selling process.

With the affordable advertising fee, we may see more individual car owners selling their used vehicles on their own.

This is a win-win situation for both the sellers and Carsales. The platform allows the seller to reach a larger pool of prospective buyers, while more individual seller listings generate more activity and revenue for Carsales.com.

2. Strong branding

Over the years, Carsales has grown to be a major player in the online automotive classified market in Australia. It is now a household name for most Australians.

The company’s powerful branding is evident from its strong online presence, customer-centric focus and its on-going expansion into the global automobile classified market.

3. Network effect

A network effect occurs when an increased number of participants or users lead to an increase in the value of a good or service. This is where Carsales.com stands out.

As more people list their vehicles for sale on Carsales.com, more buyers will emerge. This will then lead to even more people listing their vehicles for sale.

This network effect naturally forms an unprecedented competitive advantage for Carsales.com that makes it difficult for competitors to penetrate its market.

Foolish Takeaway

At present, the growth potential of this $3 billion market cap vehicle sales website has no known boundaries. Further expansion beyond its current operation network of Asia Pacific and Brazil will likely bring an increase to its revenue.

The Carsales.com share price is currently trading at price to earnings of about 17 times. I believe it is a good idea to add Carsales.com to your watchlist as a potential future addition to your portfolio. At the moment, I also have REA Group Limited (ASX: REA) and Afterpay Touch Group Ltd (ASX: APT) on my watchlist.

 

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Motley Fool contributor Ivan Loh has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended carsales.com Limited and REA Group 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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