We recently compiled a list of the 7 Best Small Cap Automotive Stocks to Buy. In this article, we are going to take a look at where OPENLANE Inc. (NYSE:KAR) stands against the other small cap automotive stocks.
The International Automotive Industry
The automotive industry is one of the fastest-growing industries, especially with the recent surge in demand for Electric Vehicles (EVs) across the globe. According to a report published by Fintech Futures, the global automotive industry was valued at $4.4 trillion in 2024. The market is expected to grow at a compound annual growth rate of 5.66% to reach $6.7 trillion by 2032. The recent trend of EVs, autonomous vehicles, and innovative technology has revolutionized the automotive sector. The transformation is expected to boost auto revenues by nearly 30% during the projected period.
The international automotive industry market share has been changing drastically during the year. According to a CNBC report published on June 14, Chinese automakers have overtaken the US in terms of sales for the first time. Chinese automakers, led by BYD, sold 13.4 million new vehicles in 2023 surpassing 11.9 million vehicles sold by their US counterparts. On the other hand, the Japanese automotive industry stood undefeated by selling 23.59 million new vehicles during the same year. Moreover, China’s sales growth also outperformed that of the US. The country grew its automotive sales by 23% during the year as compared to a 9% growth by the US.
China has been focusing on growing its exports of the automotive industry to capture the international market. According to another CNBC report published on June 27 Chinese automakers are expected to achieve 33% of the global automotive market share by 2030. As of 2024, China has already captured 21% market share and sales of automobiles outside of China are expected to grow from 3 million this year to 9 million by 2030. Currently, around 59% of Chinese automotive sales come from within the country, with Russia being the largest market for Chinese automotive at 33%. If you want to read more about automotive industry trends you can look at the Top 18 Automotive Industry Innovations and Trends.
The US Automotive Industry Outlook
The United States is one of the key players in the international market. According to a report by Alliance for Automotive Innovation, the sales of new vehicles in the month of June dropped 3.4% year-over-year amounting to 1.32 million. The slow down in the sales is mainly attributed to higher prices and interest rates that hinder a stronger market. However, the full year sales estimates look better, with new vehicle sales expected to reach 16.1 million during the year, indicating a 12.4% increase from last year. On the other hand, on June 25 Reuters reported that uncertainty looms in the US automotive industry as the upcoming elections are expected to reshape the US economy. Cox Automotive reiterated its full year 2024 guidance at 15.7 million units.
The US consumer market has been reluctant to purchase vehicles due to inflation, and some shoppers are expected to keep holding back due to election uncertainty. As per Reuters, around 74% consumers and 81% dealers believe that inflation is the top concern and that the election is likely to influence it. This has led to a sell-off in auto stocks and many companies with strong fundamentals are now available at cheaper prices. With that, let’s now look at the 7 best small cap automotive stocks to buy.
Our Methodology
To compile the list of best small cap automotive stocks to buy we used Yahoo Finance and Finviz stock screeners. We set the market cap range between $250 million to $2 billion to get small cap stocks only. We checked auto manufacturers, auto and truck dealerships, and also auto parts for this article. Once we had a consolidated list of small cap automotive stocks, we selected and ranked the stocks that were the most widely held by institutional investors, as of Q1 2024. The list is in ascending order of the number of hedge funds holders for each stock.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A line of used vehicles in a spacious lot, ready to be sold at an auction.
OPENLANE Inc. (NYSE:KAR) operates as a digital marketplace for used vehicles, connecting dealers, rental companies and independent sellers to buyers across the United States, the Philippines, Europe, and Uruguay. The company runs its business through two main business segments, namely Marketplace and Finance. The marketplace segment offers an app based digital platform that allows dealers to buy and sell used vehicles. The platform includes various features including different sales formats, inspection services, transportation, and administrative services. On the other hand, the finance segment provides vehicle financing services such as the floorplan services (short-term, inventory-secured loan financing for independent used vehicle dealers). OPENLANE Inc. (NYSE:KAR) generates its revenue through charging fee per transaction on its marketplace platform and through interest and fee from its finance service to dealers.
What set’s OPENLANE Inc. (NYSE:KAR) apart from its competitors is its ability to facilitate large volumes of vehicle transactions. In 2023 alone the OPENLANE platform was used to transact more than 1.3 million used vehicles, amounting to approximately $24 billion in sales. The company posted a successful first quarter of 2024 and grew its revenue by 4% year-over-year during the quarter, mainly due to a 13% increase in unit volume sales through its marketplace segment. The increase in marketplace volumes also contributed to the profitability of the company and delivered approximately $35 million in adjusted EBITDA. Although the financial segment of OPENLANE Inc. (NYSE:KAR) witnessed a 2% decrease in net revenue, due to higher net credit losses and low interest rate, it was still able to generate $40 million in adjusted EBITDA. As a result, the consolidated adjusted EBITDA of the company for the first quarter reached $75 million and the company was able to generate $100 million in cash flow from operations.
KAR isn't too expensive at current levels. It's trading at 22 times its forward earnings, a 15% discount to its 5 year average. Analysts expect earnings to grow by 22% during the year to reach $0.22. Wall Street is also bullish on KAR, with 7 analysts having a consensus Buy opinion. The average price target of $19.50 implies an 11.62% upside from current levels.
KAR was held by 25 hedge funds in Q1 2024, with total stakes worth $309.9 million. Of those Hawk Ridge Management was the largest investor and held a position worth $76.2 million.
Overall KAR ranks 4th on our list of the best small cap automotive stocks to buy. You can visit 7 Best Small Cap Automotive Stocks to Buyto see the other small cap automotive stocks that are on hedge funds’ radar. While we acknowledge the potential of KAR to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KAR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
