Why TrueCar's IPO Looms as a Bear-Market Test

NEW YORK (TheStreet) -- I stumbled across TrueCar twice -- both times unexpectedly -- during the last two weeks.

The first was when I went car shopping, and the fast-growing Internet car-buying service turned up at the top of Google (GOOG) results for "Hyundai Sonata hybrid pricing." The next was when I saw that Santa Monica, Calif.-based TrueCar is going public in a deal expected to price this week.

I loved TrueCar the first time. Meaning, the service is a winner with a lot of promise. I like the deal, too -- but in a much more qualified way.

TrueCar is a pretty solid-looking company going public at a time when it is growing fast and has just started making positive cash flow -- typically the best time to catch a startup on the rise.

But it's going public at a time when the market is wary of IPO candidates that make little, if any, money, which could limit the stock's short-term prospects. After all, more than half of this year's IPOs are below their debut prices, which in TrueCar's case is expected to be between $12 and $14 a share.

Put them together, and the TrueCar deal may tell us what kind of market -- fearful or greedy? -- we really have right now.

TrueCar is something like the next generation of what Auto-by-Tel and Edmunds.com set out to become -- a combination of buying service that organizes car dealers to honor the so-called "TrueCar price" and the database on new-car transactions and prices that let TrueCar make a smart market that saves consumers money.

The company claims that by making pricing more transparent, it can help dealers build customer trust and help consumers by delivering low prices without negotiating.

Dealers, theoretically, make up any price concessions in volume, sales of financing and maintenance business, and volume incentives from manufacturers.

Consumers seem to like the idea. TrueCar gets most of its revenue from collecting $299 per car its customers buy from the dealer. Unlike with lead-generation car pricing Web sites in earlier Web times, it doesn't get paid just for delivering the customer's e-mail address and phone number.

The company claims that it is now involved in about 3.2% of U.S. new car sales, and says it has delivered $3 billion in savings to consumers.

I saw first-hand how easily TrueCar can save a consumer thousands of dollars. Quite unaware I'd be writing about the experience, I looked for a Hyundai and found the car I wanted on TrueCar for a little less than $24,941. Edmunds delivers the same car for "price promise" of $27,652.

TrueCar now has enough market power that dealers are used to it: I walked into the dealer where I leased another Hyundai in 2011, asked if they would accept the TrueCar price, and they said yes on the spot. They even threw in an owner-loyalty bonus TrueCar hadn't included -- but said accepting all the incentives would mean I couldn't get interest-free financing.

So for consumers, TrueCar's a no-brainer. What about investors?

The company boosted revenue to $134 million last year from $79.9 million in 2012, and while its net loss was $25 million, it made $2.1 million in profit before interest, taxes, and non-cash charges.

Best of all, the revenue jump was achieved with only a $5 million jump in expenses. And that's logical. Consider how I found TrueCar: In a Google search, it came up at the top of the "earned,'' or not paid-for, search results. That's a recipe for not having to boost ad spending as much as revenue keeps growing, an important long-term key for Web companies trying to make money.

In a hotter market, this is exactly when you take a company public, where TrueCar's proposed valuation of nearly $1 billion wouldn't be a big problem. It's the point where it's hard to deny that the company is on the cusp of profitability, and yet early enough to avoid being valued as a mature business.

It has its risks -- Twitter (TWTR) was also unprofitable but approaching positive cash flow when it went public, and the stock has soured after its early surge. But as Twitter's early reception shows, a confident market snap this kind of deal up.

But this is not, lately, a confident market. All sorts of high-growth Web and tech stocks have been beaten up, from older companies such as Tesla (TSLA) to newer IPOs such as Twitter.

If TrueCar comes out on the wrong day, it might be available at a price you'd want to exploit. Or if the market is happy, it might shoot to a place where it's smart to let the hedge funds have their first-day pop and wait for the shares to be cheaper later.

It could go either way. The point here is that the way it does go will tell us more than any Washington speech about what the state of Wall Street's confidence is right now.

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At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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