Car Group (ASX.CAR) shares have sold off around 25% from a year ago on fears of technological disruption from artificial intelligence. We have analyzed the AI threat in detail and revisited our thesis.

Why it matters: Market enthusiasm for AI has drawn in many other sectors, including online marketplaces like Car Group. But the enthusiasm about AI seems indiscriminate, excessive, and unwarranted.

  • We think online marketplaces like https://www.carsales.com.au/ will remain the dominant method of vehicle discovery. We do not expect nearly three decades of optimizing the search experience for websites to be surpassed by conversational AI-search.
  • We think conversational AI search primarily competes with services provided by dealerships. We therefore expect online penetration of vehicle marketing activities to increase commensurately, benefiting Car Group.

The bottom line: We maintain our fair value estimate for narrow-moat Car Group of $33 per share. Shares currently screen as materially undervalued, following excessive fears around the threat of AI.

  • We think AI will have a negligible impact on Car Group, with small market-share losses to AI agents offset by increased online penetration.

Big picture: We believe most people would struggle to clearly describe what they want in a vehicle, without prompts. For these people, the filter-based search experience on Car Group’s websites provides guardrails that help them quickly narrow their search.

  • AI-based vehicle discovery will essentially try to do the same thing. However, it will do so in a conversation through a series of qualifying questions, which is inherently slower.

AI Impact Expected to Be Net-Neutral for Car Group

We expect the medium- and long-term strategic focus for Car Group to revolve around functional and geographic expansion. We also expect the company to focus on incorporating AI-powered conversational search into its websites.

We expect Car Group to capture a larger part of the car retailing value chain, especially in its original Australian online marketplace for automotive, www.carsales.com.au. Car Group has been a highly innovative company since its launch over two decades ago, launching countless improvements and features to www.carsales.com.au to increase the return on marketing spend for dealerships and private sellers, while simultaneously increasing its own take rate. However, www.carsales.com.au is currently still mostly a marketing channel, which leaves significant opportunity beyond marketing, especially in the buying and selling of cars through its Instant Offer and Carsales Select products. We believe these products address significant pain points for consumers, especially younger ones, and expect adoption of these products to drive take rate for the medium to long term.

Beyond Australian automotive, we expect Car Group to focus on consolidating its markets. Among Car Group’s overseas markets, we believe its South Korean subsidiary, Encar, has been most successful in entrenching itself as the dominant local online marketplace with its guarantee product, while its Brazilian subsidiary has been successfully leveraging its regional leadership positions into national dominance. We believe online marketplaces for vehicles (as opposed to property and employment) are inherently conducive to consolidation due to the indivisibility of their category. We therefore believe Car Group will be successful in these overseas expansion efforts.

Beyond automotive, we expect Car Group to continue refining its pricing strategy in its United States subsidiary for nonautomotive, Trader Interactive. Trader Interactive boasts impressive market-leading positions in recreational vehicles and powersports, and we believe these are significant enough to enable it to transition toward a more sophisticated pricing strategy, which will improve Car Group’s take rate.

Bulls Say

  • Car Group’s online marketplace for Australian automotive, www.carsales.com.au, has established itself as the undisputed leading online marketplace for automotive, supported by networks effects and cost advantages.
  • Car Group has launched new products in Australia to capture a larger part of the automotive retail value chain, which will increase its take rate over time.
  • Car Group has a history of successful overseas expansions and recent investments in lower-maturity online marketplaces in the United States and Brazil provide opportunity for growth.

Bears Say

  • Car Group’s recent investments in overseas online marketplaces have been done at arguably expensive multiples.
  • Car Group invests in online marketplaces in developing markets, especially Latin America, where significant investment may be required to capture the market.
  • Self-driving cars may affect the share of the population owning private vehicles and therefore shrink the market in which Car Group operates.