Companies that dominate their markets are highly sought-after by investors. This is because they often make huge profits that can be relied on year after year and can deliver exceptionally good returns to their owners. Auto Trader (AUTO), the owner and operator of the UK’s largest automotive marketplace, seems to fit this description. But how long can it keep on growing its profits?
The business
If you were going to create the ideal business to invest in then you would probably base it around a product or a service that is very difficult to compete with. One of the best ways to do this is to create something that your customers become reliant on and can’t do without and which increases the more people buy and use it. This is known in financial jargon as a network effect and, as we shall see, Auto Trader is a great example of it.