The Carsales.com Ltd (ASX: CAR) share price is one of the success stories of the S&P/ASX 200 Index (ASX: XJO). Over the past decade it has risen by around 190%.
Despite all of the volatility with ASX tech shares this year, Carsales shares are only down by around 14%. That compares to names like Xero Limited (ASX: XRO) which is down 52% since the start of the year. Another is the REA Group Limited (ASX: REA) share price which has fallen by around 30%.
Fund manager Alphinity has been thinking about the outlook for the Carsales share price. With that in mind, one of the investment team – Jacob Barnes – recently visited the United States. Barnes went to look at the company's American acquisition, Trader Interactive, which it bought for $1 billion. This business owns RV Trader, which is the largest online advertiser of RVs in the US.
For people who don't know, an RV is between the size of a van and a bus, with things potentially included like satellite TV, a bath and so on. Barnes visited Oklahoma, which he called the "RV capital of the world".
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How Carsales shares could benefit from price rises
Barnes thought it would be a good idea to hear what customers think about the service, its effectiveness and pricing.
It's useful to know if customers think the service is "compelling or if it would be the first thing cut if tougher economic conditions arise". As this could make or break a company's investment case.
According to Alphinity, the broad consensus of the RV dealers it spoke to said that RV Trader generated the largest number of leads of any source, despite price increases.
Alphinity wrote:
This hints at some of the latent pricing power inherent in Trader Interactive, which is much earlier in its maturity than Carsales, where it is by far the Australian market leader and provides a crucial service for almost all car dealers.
RV Trader's importance within the RV market is only likely to increase. Demand conditions are expected to cool somewhat from COVID-induced excesses meets an improved supply dynamic as supply chains to the RV manufacturers begin to free up.
The COVID period was "quite favourable" from an RV dealer's perspective. It helped support dealer margins. But it also meant that "advertising for new leads was far less important given demand exceeded supply". It also allowed some dealers to cut back on the number of premium ads they placed on RV Trader, boosting dealer margins further.
The fund manager said that in a normalised environment, the flow of leads becomes "even more crucial to dealers".
Could economic challenges hurt the Carsales share price?
It's possible, and the Carsales business is a globally diverse company, so it could be impacted in various ways. However, on the RV Trader side of things, the fund manager said:
While some might be tempted to cut costs, it seems unlikely they will use cutting advertising as a savings opportunity considering turnover is the lifeblood of RV dealerships, in fact, if anything it is more likely that dealers will need to increase the number of premium ads they buy to drive turnover in a more subdued demand environment.
The fund manager also referenced that "many" RV sales are being made to wind power companies and contractors because turbines are "often located a vast distance from the nearest town". Inflation has also increased the cost of lodging, making RVs even more attractive.
Recent movements
Over the past month, the Carsales share price has risen by 12%.
