Vehicle sales will fall worldwide in 2022 and 2023, at least that is what analysts expect.
In the United Kingdom, an online car sales company is in trouble because of that, but it could also benefit and its shares could outperform average prices.
This is Auto Trader, which earns significant revenues from selling packages to retailers.
It is not a simple matter to analyze the investment scenario related to Auto Trader Group given the current complicated macroeconomic conditions.
The online car buying and selling platform makes money from the volume of vehicles sold on the website, but also from marketing services to retailers using its platform.
These services include advertising packages and a product to help sell cars in locations further away from where the vehicle is offered.
On the one hand, it should be noted that sales volumes in the automotive sector are down this year in most markets.
In the case of the UK, for example, supply shortages caused new car registrations to fall by 11 percent and used transactions fell by 16 percent compared to the same six months in 2021.
To compensate for the drop in volumes on the website, Auto Trader has been selling more “higher yield” packages to its customers.
This helped increase its average revenue per customer by 9 percent. Now, 32 percent of stock is sold through above-standard packages, up from 25 percent last year.
Buy or sell Auto Trader stock?
The inflation-plus-recession crisis will likely reduce overall demand for vehicles.
However, one of the collateral damage Auto Trader can take advantage of is that retailers will be willing to pay more money for better access to customers who are in the market.
So far, that’s how it’s performing and with an operating margin of 60 percent, all indications are that the platform has strong pricing power from being the UK’s leading used car website.
One issue to keep in mind when deciding to invest in Auto Trader is that operating margin fell last year due to the Autorama acquisition.
The company bought the auto leasing marketplace in June, and a deferred consideration charge was applied in the middle. Eliminating this, operating profit actually rose 7 percent instead of falling 2 percent.
Auto Trader management expects operating margins to return to 70 percent, if so, we are looking at a great entry point.
Analyst consensus expects adjusted earnings per share to increase to a price/earnings ratio of 20 by 2023.
Strong margins and market dominance justify the price. If you own shares of Auto Trader, it would not be a good idea to sell now.