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Jul 07, 2023

CarParts.com (NASDAQ:PRTS) Stock Benefits from This Overlooked Narrative

With the global electric vehicle (EV) rollout dominating the broader mobility investment space, an enterprise like CarParts.com ( NASDAQ:PRTS ) – which specializes in online sales of aftermarket

With the global electric vehicle (EV) rollout dominating the broader mobility investment space, an enterprise like CarParts.com (NASDAQ:PRTS) – which specializes in online sales of aftermarket components – might seem a bit irrelevant or anachronistic. However, an overlooked narrative augurs well for the surprisingly enticing (albeit risky) enterprise. Therefore, I am bullish on PRTS stock.

Although the Federal Reserve has done everything within reason to combat stubbornly-high inflation, the harsh reality is that the consumer economy continues to suffer under the weight of elevated prices. Therefore, PRTS stock enjoys a cynical upside catalyst. Many, if not most, U.S. households lack the discretionary funds to effortlessly buy replacement vehicles. Subsequently, people may drive their cars until the wheels fall off.

Over the past several months, much talk has materialized about used car prices falling. Some analysts even sounded the alarm about an automobile oversupply. To be sure, prices are indeed fading against their all-time highs posted during the pandemic. However, they remain elevated against pre-pandemic norms.

Even if prices did drop to the same point right before the COVID-19 crisis, on a net basis, consumers would still be worse off today. That’s because borrowing costs stand at comparatively ridiculous heights. Keep in mind that prior to the pandemic, most consumers – whether buying new or used – financed their vehicle acquisitions.

In fact, The Washington Post reported earlier this year that nearly 17% of car buyers have a monthly payment of $1,000 or more. While some folks can pull that off, most consumers probably cannot. So, with benchmark interest rates moving higher, a clear incentive exists to keep existing cars running as long as possible.

Fundamentally, this narrative should lift PRTS stock. Even better, outside circumstances should continue favoring the aftermarket parts industry.

While it’s one thing to speculate on the upside implications of PRTS stock, it’s another to see confirmation of the underlying catalyst. Specifically, two key data points will favor CarParts.com. To be 100% clear, favorable winds don’t guarantee shareholder profits. However, they serve the role of confidence boosters.

First, in 2022, The Wall Street Journal reported that the average age of vehicles on U.S. roadways reached a then-record 12.2 years. This year, S&P Global Mobility declared that this same statistic hit 12.5 years. Interestingly, for sedans, the average age spiked to 13.6 years.

Essentially, the average consumer just can’t bear the financial burden of the post-pandemic paradigm. Cynically, for the time being, this framework helps PRTS stock.

Second, an increasing number of companies are walking back their remote work policies and implementing hybrid schedules. While some pushback naturally erupted, members of the broader working class don’t have unlimited funds. Therefore, if push comes to shove, it’s likely the workers will acquiesce.

Again, investors should enjoy a positive fundamental backdrop for PRTS stock. By logical deduction, more commuting translates to more wear and tear, benefiting parts suppliers. Even if consumers decide to buy replacement vehicles, those will eventually require fresh parts too. Therefore, CarParts.com commands a surprisingly robust demand profile.

To be fair, PRTS stock is volatile, shedding nearly 30% of its market value since the beginning of this year. Much of the red ink centers on CarParts.com’s lack of profitability. However, the stock has gained in the past month or so. An improving fundamental backdrop could invigorate its growth picture, thus eventually leading to profitability.

At this juncture, it’s arguably a credible assumption. In 2022, CarParts.com posted revenue of $661.6 million (with $671.8 million for the trailing 12 months), almost 14% higher than 2021’s tally of $582.44 million. As the company’s total addressable market expands due to the unique economic impact of COVID-19, the top line could potentially grow longer term.

Even better, PRTS stock trades at a trailing-year revenue multiple of 0.4x. However, the average sales multiple for the auto parts sector comes in at a higher 0.62x. Thus, even if PRTS is risky, smart speculators should at least look under its hood.

Turning to Wall Street, PRTS stock has a Strong Buy consensus rating based on five Buys, zero Holds, and zero Sell ratings. The average PRTS price target is $10.38, implying 135.4% upside potential.

Although PRTS stock might not seem the most relevant idea at face value, the tough backdrop of the consumer economy draws intrigue. Basically, consumers collectively don’t have the financial wherewithal to acquire replacement vehicles worry-free. Therefore, the addressable market for CarParts.com is wider than many investors recognize. Subsequently, this framework sets up a contrarian opportunity.

Disclosure