Auto Trader market dominance mitigates macro uncertainty

The situation at Auto Trader (AUTO) hasn’t changed much since its half-year results. Semi-conductor shortages are still hitting supply chains, which means there are less cars listed on the website. However, Auto Trader is still managing to offset this fall in volume by increasing its revenue per retailer.

The main difference now – compared with November when it released the half-year results – is the diminishing macroeconomic condition. This is out of management's control but will still have a detrimental impact on the business. If car retailers are making less money then they will have less to spend on Auto Trader services.

Next year, management expects stock revenue to be flat, but plans to offset this with increased pricing and upselling of new products to retailers. This is same strategy that brought it success last year.

In FY 2022, physical car stocks fell 11 per cent to 430,000 but this was more than offset by the 149 per cent jump in average revenue per retailer (ARPR) to £2,210 per month. This figure was inflated by the Covid-19 discounts it offered last year but, stripping these out, ARPR still increased by 28 per cent.

Auto Trader can increase ARPR either by asking the retailers for more money to list cars on its website or by upselling them products. There is the Basic package, and then the Enhanced, Super and Ultra packages on offer. Last year it increased the penetration of the “higher yielding packages” with 31 per cent of retailer stock using them, up from 26 per cent. The very high operating margin of 70 per cent suggests it does have pricing power.

A new Market Extension product was also launched which allows customers to sell vehicles outside their local area. At the end of the year, only 6 per cent of retailer stock was using this product, which implies there is room for 'upselling' opportunities. However, it is limited to customers that have delivery capabilities.

Even if the macro conditions are worsening the good news is that Auto Trader is now eight times larger than its nearest competitor. Retailers have few other options than to list their products on the website. Cash generation is also strong – with Peel Hunt forecasting a 2023 free cash flow yield of 5 per cent.

The expensive forward PE ratio of 21 is the result of strong margins and market dominance. Given the macro headwinds this price seems fair for now. We stick to hold.

Last IC View: Hold, 697p, 11 Nov 2021