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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.
