Auto Trader has been selling cars too quickly for its own good

Telegraph

7 hours ago

The UK economy's outlook is significantly more positive than many investors realise. For example, inflation is set to gradually fall to the Bank of England's 2pc target over the next 18 months. This should allow further monetary policy easing to take place that, alongside the impact of recent interest rate cuts, boosts economic growth.
Clearly, the existence of time lags following interest rate cuts, fiscal policy uncertainty and ongoing geopolitical risks could weigh on the UK economy's near-term performance, but in an era of lower inflation and an increasingly loose monetary policy, the direction of travel for the profits and share prices of UK-focused firms is highly likely to be materially upwards over the coming years.
As a result, Questor continues to be bullish about the prospects for Auto Trader Group. The online automotive marketplace is well placed to benefit from an increasingly upbeat consumer outlook amid further positive real-terms wage growth, particularly as it enjoys an extremely dominant market position. In fact, it is 10 times larger than its nearest competitor, with its website home to over 75pc of every minute spent on automotive marketplaces in the UK.
Furthermore, its latest annual results showed that return on equity was around 50pc. This is exceptionally high and, even more impressively, was achieved in tandem with extremely low debt levels. In fact, the firm's net debt position from 2024 reached a net cash position amounting to £15m in 2025. This means the business is capable of continuing to invest in its operations even if the aforementioned geopolitical risks come to the fore in the short run.
A strong competitive position meant the company was able to further raise prices during its latest financial year. Indeed, its significant pricing power will allow it to benefit from any improvement in the operating conditions and profitability of automotive retailers as interest rates and inflation both fall. With a constant stream of new products being launched, including those that harness artificial intelligence, it seems likely that the firm will at least maintain its substantial competitive advantage in future.
Of course, investor sentiment towards Auto Trader has been highly erratic of late. The firm's latest annual results prompted a sudden 11pc share price slump on the day of their release in May. Although the company posted a 12pc rise in earnings, revenue growth dropped by nine percentage points to 5pc. This was partly caused by vehicles listed on its platform selling at a faster rate than in the prior year, thereby reducing demand for the firm's advertising opportunities, which could persist for at least part of the current year.
While the stock's price has only partially recovered from its slump, it has still risen by 78pc since Questor tipped the company as a 'buy' during September 2018. In doing so, it has outperformed the FTSE 100 by 61 percentage points.
Despite this, the company's price-to-earnings ratio of 26 is unchanged from its level at the time of our original tip. While it is undoubtedly a generous rating compared with many other large-cap shares, even while the FTSE 100 trades close to a record high, this column believes it still represents fair value for money.
The company, for example, is due to deliver annualised profit growth of 11pc over the next two years. Furthermore, its solid financial position and clear competitive advantage mean it is a high-quality business that deserves a premium rating compared with the wider index.
Of course, investors should not conflate an upbeat UK economic outlook with a period of plain sailing for share prices. Even during its most bullish periods of yesteryear, the stock market has still experienced bouts of extreme volatility.
Similarly, the economy's improving performance is unlikely to be smooth progress, with inflation set to prove sticky at times and interest rate cuts likely to take many months to fully impact GDP growth, wage growth and, ultimately, the operating environment for UK-focused firms.
However, in Questor's view, investors who back high-quality UK-focused stocks such as Auto Trader, take a long-term view and accept elevated volatility in the short run are likely to ultimately be handsomely rewarded.