TrueCar is Ready to Re-accelerate Revenue Growth

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TrueCar's (NASDAQ: TRUE) mission is to transform the car-buying process by providing more transparency and convenience. The company works with dealerships to provide price information online, allowing consumers to comparison shop before ever having to visit a dealership. This makes shoppers better informed and helps them avoid wasting time negotiating with car salesmen.

The market has punished TrueCar's stock because its revenue growth rate has declined despite promises for faster growth. Last quarter, the company once again lowered revenue growth expectations.

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After such a big reset, investors are giving up on the stock. However, the market may be throwing the baby out with the bath water. TrueCar has a solid plan to reaccelerate revenue growth by leveraging a newly rebuilt technology platform and new product features. If the company delivers on its plan, the stock is poised to rebound.

A decline in web traffic

TrueCar is in the lead-generation business. Car buyers browse TrueCar to comparison shop for new and used cars by showing him or her the prices at which various dealerships are willing to sell a car. If the car buyer follows through and makes a purchase, the car dealership will pay TrueCar a fee for each car sold.

There are a few moving pieces in TrueCar's business, but the most important factor is the number of people who use TrueCar to shop for cars. If TrueCar has a large audience of buyers, then dealerships will want to be on the platform to sell to those buyers. This creates a virtuous cycle because the more dealerships that are on TrueCar's platform, the more compelling the browsing experience is for the car buyer. This phenomenon is known as a network effect.

Last quarter, TrueCar saw its web traffic decline by 10% after a change to Google's search algorithm pushed TrueCar's website further down in search results. Despite the decline in web traffic, revenue still increased by 10% in the quarter as more cars were sold compared to the prior year. However, this is due to the time it takes for a user to purchase a car from the time they first start browsing TrueCar. In other words, TrueCar's Q4 car sales were partially attributed to web traffic from earlier quarters. The slower web traffic in Q4 will likely translate into fewer car sales in Q1 2019, which explains why the company's forward guidance was so weak.

Web traffic is a key driver in TrueCar's business. Unfortunately, the company is somewhat at the mercy of Google when it comes to driving visitors to its website. TrueCar will do what it can to adjust to the changes in Google's search algorithm, but if the company cannot reverse the decline in web traffic then there will be more pain ahead.

TrueCar's new technology platform will address several problems

Chip Perry was appointed CEO of TrueCar in 2015. Perry has an impressive resume which includes building the car shopping website AutoTrader into a $1 billion business. It is safe to say that Perry knows what he is doing when it comes to running an online car shopping company.

One of Perry's first priorities after becoming CEO was to rebuild TrueCar's technology infrastructure. TrueCar had a legacy tech platform that was inefficient and hard to modify. Not only was this infrastructure difficult to maintain, but it was also cumbersome to modify for new product features. It took three years, but the platform rebuild was completed in November 2018.

The first test for the new platform will be to reverse the decline in web traffic by improving TrueCar's search engine ranking. With the new platform, TrueCar is able to quickly make changes to its web pages, including changes to better adapt to Google's search engine algorithm.

On the Q4 2018 earnings call, management announced a new layout for its website. The new layout has been designed to streamline content and increase user engagement and is expected to significantly improve the company's search engine rankings.

The jury is still out on whether the company will be able to reverse the decline in web traffic, but management is confident that a new technology platform will help TrueCar buck the trend.

The new trade-in feature could be a game changer

After completing its technology upgrade, TrueCar turned its focus toward developing new features for its website. To that end, the company has targeted the market for vehicle trade-ins, rolling out a feature designed to facilitate trade-ins online. Because many car buyers use trade-ins to afford their next car -- 43% of all cars purchased in 2017 included a trade-in -- this new feature is a natural extension of TrueCar's lead generation business. .

TrueCar's trade-in feature allows a buyer to guarantee a trade-in price online. This means a shopper can truly know the price (net of trade-ins) they are paying before they ever step foot inside a dealership. This reduces friction in the car shopping process, which aligns with TrueCar's mission of making the process more transparent.

The company launched the trade-in product in 2018 after making an investment in Accu-Trade. Accu-Trade spent years working on the underlying technology used to guarantee trade-in prices. After successfully testing the feature in a handful of dealerships in 2018, TrueCar is rolling out the feature nationwide in 2019. Given that so many car buyers rely on trade-ins, the new feature is expected to improve TrueCar's ability to facilitate car sales. This is yet another way TrueCar can reaccelerate revenue growth in the near future.

Advertising is a major opportunity

Most online businesses rely on selling advertising, but TrueCar has been somewhat unique in its reliance on a transaction-driven business model. However, TrueCar believes its platform would be well-suited for ads targeting car buyers and thinks it can increase its advertising revenue without hurting the customer experience.

TrueCar is an attractive advertising platform for automotive brands because it has a large and highly targeted audience. Last year, a monthly average of 7.5 million people visited TrueCar's website and app. Even with the decline in traffic at the end of the year, this is a substantial audience for advertisers. Furthermore, TrueCar's visitors are highly motivated to make an automotive purchase -- otherwise they wouldn't be on the website. The targeted nature of TrueCar's users makes the audience more valuable to advertisers.

TrueCar wants car manufacturers to advertise on its website. As a group, car companies are one of the largest advertisers, spending as much as $18 billion a year. Today, car companies spend most of their advertising budgets on TV spots, but advertising spend across the board is shifting to digital channels. If TrueCar can capture even a small sliver of the industry's ad budget, it would be a huge win for the company.

In 2018, TrueCar booked advertising revenue of $30 million, a nice increase over the $23.3 million it booked in 2017. However, TrueCar's advertising business is still in its infancy. The company sees advertising revenue as a much larger contributor in the future and is working diligently to court advertisers.

Final thoughts

TrueCar shareholders appear to have given up on the stock. Management has failed to meet the expectations it set for revenue growth and may not deserve the benefit of the doubt. However, the company is poised to reverse the web traffic decline it experienced last year. Furthermore, new products, including trade-ins and advertising, could add fuel to the fire and help reaccelerate revenue growth. If the company can execute on this strategy, investors may be rewarded for holding on.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Luis Sanchez has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends TrueCar. The Motley Fool has a disclosure policy.