What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher revenue and profit for the first half of FY25

| More on:
Young Black woman looking concerned while in front of her laptop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Having done rather well over 2024, the Auto Trader (LSE: AUTO) share price slammed into reverse today (7 November) as the market digested the latest set of half-year results from the company.

Since I’ve long admired the FTSE 100-listed automotive platform for its ability to steadily compound investors’ wealth, is this my golden opportunity to buy in?

What’s the problem?

At first glance, the headline numbers looked pretty good to this Fool.

Group revenue rose 8% to £302.5m in the six months to the end of September, while operating profit increased 14% to £188.4m. Retailer revenue also climbed by 8% — in line with expectations.

Interestingly, demand for used cars has been “strong“, according to the company. When combined with a reduced supply, this has sent cars virtually flying out of dealers’ forecourts. Having fallen last year, prices have also showed signs of stabilising. Sounds pretty positive, right?

Not so fast

Investors seem concerned by a few things.

For one, the aforementioned boost to revenue came from smaller dealers. This ended up weakening the firm’s average revenue per retailer (ARPR). The company also added that it expected this figure to be “slightly negative for the full year“.

The new car retail market “remains challenging” too. Volumes declined by 10% in the first half of the year, despite discounts being offered.

Another potential issue is the Financial Conduct Authority’s recent ruling that those offering car finance, including dealers, could not take a cut without disclosing to the customer how much that was and how it was calculated.

While the company has sought to reassure its investors that its finance arm will be unaffected, the whole episode doesn’t appear to be helping sentiment.

Quality stock

Although some aspects of today’s statement weren’t encouraging, it’s worth asking whether a 7% fall (as I type) is justified. Part of me wonders if this is overdone.

One of the things I like about Auto Trader is its almost total dominance of the market it serves. According to the company, it was 10 times larger than its nearest competitor by the end of the reporting period. That’s surely the sort of ‘economic moat’ that would catch even Warren Buffett’s eye!

On top of this, the £8bn cap scores consistently well on key ‘quality’ metrics. Thanks to being purely online, operating margins are some of the highest in the UK market. The same goes for the returns it generates on money invested into the business.

Frothy valuation

On the other hand, the valuation should be considered.

Before markets opened this morning, the forecast price-to-earnings (P/E) ratio stood at 26. That may not seem unreasonable for a company in the tech sector. But it’s dear relative to the rest of the UK market. So, perhaps it was always likely that any slight wobble would be punished by the market.

Yes, there are dividends. But the yield is pretty negligible. So, if Auto Trader shares were to continue falling from here, I wouldn’t receive much compensation for remaining invested.

For now, I’m going to monitor the stock and see how the aforementioned FCA ruling plays out.

This is a stock I very much want to own but only at a price that I think offers real value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

As the BT share price slumps on H1 results, should I buy for big dividends?

Just when I thought the BT Group share price could be set for a new bullish run, the telecoms giant…

Read more »