Car prices are nearing record highs owing to rising demand amid a supply shortage. And because car inventories are expected to remain low given a global semiconductor chip shortage, car prices should continue to rise in the near term, boosting the profit margins of auto retailers CarGurus (CARG) and Cars.com (CARS). So, as such, we think it could be wise to bet on these stocks now.

The pandemic-driven global industrial shutdown last year resulted in the slow down or idling of automobile plants. A global semiconductor chip shortage has depressed automobile production significantly too. But the demand for new cars has been rising sharply over the past couple of months. This is evident in a 34% year-over-year rise in new car sales in May, compared to a 10.6% growth in May 2019.

As of May, the average new car price hit a record $38,255, 12% higher from the same period last year. In the used car market, prices are up 39% since the beginning of this year. This trend is expected to continue, owing to low car inventories amid surging demand.

Given this backdrop, we think shares of auto retailers CarGurus, Inc. and Cars.com Inc.  are well positioned to deliver solid returns in the coming months.

CarGurus, Inc.

CARG is an online automotive marketplace that connects buyers and sellers of new and used cars internationally. The Cambridge, Mass., company helps shoppers find great deals from top-rated dealers. Currently CARG  has more than 44 million global average monthly unique visitors.

On May 21, CarOffer, a wholly owned subsidiary of CARG, reported record levels of dealer enrollment on its automated instant wholesale vehicle trade platform. This demonstrates CARG’s substantial market share in the used cars sector.

CARG’s revenue increased 8.7% year-over-year to $171.4 million in its  fiscal first quarter, ended March 31. Its net income stood at $19.6 million, up 54% from the same period last year. And its income from operations grew 114.6% from the year-ago value to $25.8 million. The company’s EPS increased 72.7% year-over-year to $0.19.

A $768.2 million  consensus revenue estimate  for the current year indicates a 39.3% increase year-over-year. The Street expects the company’s EPS to rise 1.9% from the prior year to $1.09 in the current year. CARG surpassed Street EPS estimates in three of the trailing four quarters. CARG has gained 1.3% over the past year. The stock has gained marginally intraday to close yesterday’s trading session at $26.33.

CARG has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

CARG has an A  grade for Quality, and a B grade  for Growth and Value. Among the 72 stocks in the Internet industry, CARG is ranked #4.

Click here to view additional CARG ratings for Momentum, Sentiment, and Stability.

CARG shares were trading at $25.44 per share on Friday afternoon, down $0.89 (-3.38%). Year-to-date, CARG has declined -19.82%, versus a 16.77% rise in the benchmark S&P 500 index during the same period.

Cars.com Inc. 

CARS is a leading digital marketplace and provides solutions for the automotive industry over a digital marketplace. This online platform connects buyers and sellers across five Websites: Cars.com, Auto.com, DealerRater.com, NewCars.com and PickupTrucks.com. CARS is based in Chicago.

On June 28, CARS unveiled its new digital platform, upgraded with its “real-time inventory update’’ feature and built on cloud-based technology to offer a dynamic experience to buyers and sellers.

CARS’s revenue increased 3.5% year-over-year to $153.30 million in its  fiscal first quarter, ended March 31. Its operating income grew 101.8% from its  year-ago value to $16.55 million, while its net income improved 100.7% year-over-year to $5.28 million. The company’s EPS increased 100.7% year-over-year to $0.08.

Analysts expect CARS’s revenues to increase 13.4% year-over-year to $620.68 million in the current year. A $1.68  consensus EPS estimate for the current year indicates a 64.7% rise from the last year. CARS has an impressive earnings surprise history as well; it beat the consensus EPS estimates in three out of trailing four quarters. Shares of CARS have gained 154.1% over the past year and 27.7% year-to-date.

It is no surprise that CARS has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The stock also has a B grade for Growth, Value, and Sentiment. It is ranked #5 in the  Internet  industry.

To see additional CARS ratings for Quality, Stability, and Momentum, click here.