Why Auto Trader shares slumped on latest results
There's lots to like in this set of annual results but nothing that gets the pulse racing. ii's head of markets runs through the numbers to assess prospects.
29th May 2025 08:29
by Richard Hunter from interactive investor
Despite its unassailable position, Auto Trader Group (LSE:AUTO) continues to drive into new innovative areas to protect its lead.
Its “Deal Builder” product, which enables car buyers to value their part exchange vehicle, apply for finance and reserve a vehicle online for a fee is showing brisk growth. It is now available at 2,000 retailers, up from 1,100 the previous year, while the number of deals has more than trebled in that period from 16,000 to 49,000. In addition, its “Co-Driver” initiative is aimed at improving the experience for both consumers and retailers by employing a new suite of AI-powered tools which will be further expanded in the coming years.
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From a broader perspective, Auto Trader evades some of the constraints of a cyclical business in that its model is largely linked to the number of used vehicles available for sale in the UK at any given time. As such, this supply tends to operate independently from the wider economic backdrop, given the ongoing consumer needs for transport. It is new car sales where more of an effect is likely, such as during the pandemic, when the need and therefore demand for vehicles dropped significantly and more broadly in tougher economic times when consumer spend can be limited.
Indeed, the supply issue has been something of a blessing and a curse of late for the business. On the one hand, cars are selling faster than at any time over recent years, but by the same token constrained supply has resulted in stock growing more slowly than expected given the speed at which the vehicles are selling. This in turn leads to shorter periods of advertising, which impacts revenues.
Even so, the immediate future is littered with positive prospects. While Auto Trader recognises that the need for physical showrooms will retain some attraction for several years to come, the landscape is evolving towards a shift towards online car buying and the group is well-placed to capitalise on both. At the same time, its dominant position – it estimates being ten times larger than its nearest competitor – brings its own benefits of scale and therefore rewards.
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A strong recent run in the share price has led to some significant investor displeasure at the stock market open, given that the results were no more than in line with estimates and with the outlook containing few positive surprises. This comes despite an increase of 5% in revenue for the year ended 31 March to £601.1 million and a hike of 8% in operating profit to £376.8 million, underpinned by a continually extraordinary operating profit margin of 70% for the Auto Trader line and 63% for the group as a whole.
The group has also strengthened its balance sheet, with a net cash position of £15.3 million comparing to a net debt level of £11.3 million the year previous, enabling a share buyback programme to be undertaken alongside an increase to the dividend, although the projected yield of 1.2% is pedestrian by any standards.
The challenges to the stock supply have not yet been addressed and, in addition, the Financial Conduct Authority’s investigation into motor finance practices is something of an overhang on the stock. These numbers are middle of the road by the standards Auto Trader has set itself and the shares are being somewhat punished as a result.
Today's sharp decline of almost 12% follows an increase of 23% over the last year for the shares, as compared to a hike of 6.6% for the wider FTSE100, and continuing momentum which has seen a jump of 44% over the last two years.
Improving profits bring both higher expectations and indeed valuations and even after this latest drop, the shares are not obviously cheap on a historic basis. As such, the market consensus is likely to stay at a hold for the time being, albeit a strong one, as investors assess this disappointment even though the group’s continued innovation and dominant UK market position bode well for prospects.
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