Is buying Auto Trader shares a good investment?

| Last Updated September 11, 2022

Laptop being used to buy Auto Trader shares online

Auto Trader Group Plc (LSE:AUTO) shares are listed on the London Stock Exchange, and the stock is up nearly 80% over the last five years. By comparison, the FTSE 100 is actually down over the same period. And even today, with all the stock market turmoil, shares of the online marketplace are basically flat.

Does that make this a good stock to buy in 2022? Let’s take a closer look at what this business does and whether I should consider it for my portfolio.

What does Auto Trader do?

As a quick reminder, Auto Trader provides the largest digital automotive marketplace in the United Kingdom, with around 960 employees running the show. It plays a pinnacle role in the modern-day automotive trade for both individuals and businesses.

The platform lets consumers quickly see used and new cars for sale and purchase the ones they like. In addition, Auto Trader provides other consumer services such as free car valuation and advice to users of its platforms.

Private sellers and businesses can list their vehicles for sale on the platform and then pay for various advertising packages that are the most suitable. So, how has this business model translated in terms of financial performance?

Looking at the latest 2022 results, revenue surged 65% year-on-year to £432.7m. Meanwhile, cash generated from operations more than doubled, sending the earnings per share (EPS) up 93% to 25.61p.

Needless to say, those are some pretty impressive metrics. And with growth like that, I’m surprised that the stock is up around 150% since its initial public offering in 2015.

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What lies in store for the Auto Trader share price?

Today, Auto Trader has a £6.1bn market capitalisation with around 954 million shares outstanding. Even with recent lacklustre share price performance, the stock is still trading at a P/E ratio of 25. By comparison, the FTSE 100 average is closer to 14. In other words, the valuation is far from cheap.

However, personally, I don’t think it’s unreasonable, given the results being delivered. Management has a fairly decent track record of allocating capital into internal projects to fuel growth and shareholder value. And I’m optimistic that it can continue to do so moving forward.

Recently, the company entered into a binding agreement to acquire Autorama Limited. While the deal is still subject to regulatory approval, this move significantly expands the platform’s vehicle leasing options.

Meanwhile, its Market Extension product just launched, allowing customers like local businesses to advertise their vehicles outside the local area to reach a wider car buying audience.

It’s too soon to tell whether these latest moves will deliver on management’s expectations. But I wouldn’t be surprised to see the Auto Trader share price continue to climb if these projects are successful.

What are the risks of investing?

When it comes to making an investment decision, it’s important to know the risks as well as the potential rewards. So far, Auto Trader shares have demonstrated their ability to deliver long-term growth. But that doesn’t guarantee future performance.

The company is effectively trying to disrupt the way traditional car transactions take place. Obviously, that’s not an easy task. And it’s made even harder with the rising number of competing platforms attempting to steal market share.

Furthermore, with vehicle purchases being rather expensive, I feel it’s likely the ongoing economic turmoil and slowdown in consumer spending could have a tangible impact on performance. At least in the short term. Depending on the severity of this, better-funded competitors might be able to capitalise on the situation.

Should I buy or sell Auto Trader group stock right now?

Beyond the solid growth, I find other aspects of this business encouraging.

For example, there seems to be a lot of institutional ownership that typically signals strong levels of positive professional opinion. Black Rock, the world’s largest asset manager, owns around 10% of the outstanding shares. Meanwhile, the broker forecasts from other analysts currently have a “buy” rating on the shares with a price target of 700p.

Something else that’s worth mentioning is the allure of dividends. Auto Trader pays dividends twice a year in January and August, with two years of consecutive growth. So, while the dividend yield is still firmly below 2%, that may change in the long term.

The company undoubtedly has a lot of threats and risks to contend with. And therefore, buying Auto Trader Group stock may not be suitable for every investor. But for my personal portfolio, I feel it would make an excellent long-term addition.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has published a Premium report on Auto Trader Group. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.