The history of Auto Trader reads like the logbook for one of the classic cars for sale on its website. Founded as a magazine title in 1975 by the entrepreneur John Madejski, it has become an online-only business as buying and selling motors has moved into the digital age.
Through the years its owner-drivers have included the Guardian Media Group and Apax, the private equity investor. Floated on the stock market in 2015, it has a list price of about £4.2 billion, sufficiently high to have propelled it into the FTSE 100 at the most recent quarterly reshuffle.
The group’s business model is straightforward. Roughly 85 per cent of its revenues come from the trade, effectively forecourt retailers and other businesses listing mainly second-hand but also new vehicles on the website. The company charges a range of fees based on the number of cars listed over various periods. About 9 per cent of its turnover comes from consumers, who tend to place higher-value motors on the site as they have to pay a fee, a rarity in this part of the market. The remaining 6 per cent of revenues come from manufacturers listing new vehicles and agencies advertising online.
The travails of the market for new cars — falling sales, rising costs, exposure to potential Brexit supply-chain chaos and a cyclical link to the changing economic fortunes of the buying public — are well chronicled.
The dynamics of the used car market appear to be much more stable. People tend to trade in their cars — almost always for another second-hand model — every three years or so, and this has fluctuated by no more than six months since 2004. Second-hand sales fell 2.1 per cent in the three months to the end of September quarter on quarter, according to the Society of Motor Manufacturers and Traders, which recorded a 10.2 per cent decline in turnover in new cars over the same period.
Average used car prices have also held up well, reaching a record £12,967 in November, according to a monthly Auto Trader index.
Its business model, by the way, means that it is not exposed to price fluctuations in the second-hand market, as it doesn’t take a slice of the sale tag when a car changes hands. What the figure says, however, is that while intuitively an ever-increasing stream of new vehicles coming on to the market might suggest that prices would come under pressure and create strains, that doesn’t appear to have been the case.
Despite securing its entry into the FTSE 100, Auto Trader’s shares have been under the cosh for the past few months, mainly because of the perceived competitive threat posed by the acquisition of the trade specialist motors.co.uk by Ebay, which owns Gumtree, a well-used venue for individual car listings.
In truth, the fears feel overdone. While motors.co.uk is popular with dealers and, combined, the two could pose a competitive threat, Ebay would have to find a way, probably through substantial investment, to come up with an operation capable of toppling Auto Trader from its position of clear market leader and most-recognised brand.
Auto Trader has other powerful pistons in its engine, not least its joint venture with the wholesaler Cox Automotive designed to provide an efficient and cost-effective venue that the trade can use to buy, not just sell, vehicles.
The shares, down 0.2 per cent or a fraction under 1p, at 440½p yesterday, trade for 22 times forecast earnings for a prospective yield of 1.5 per cent. Not cheap but they look attractive for those interested in the longer drive.
ADVICE Hold long term
WHY Plenty of growth potential in new car sales, consumer market and greater use of its market data
Draper Esprit
Only a brave company would brag about investing in technology companies when Apple is cutting sales forecasts and valuations of the world’s digital “disruptors” have taken a heavy beating.
The tech sector seems to hold no fear for Draper Esprit, a listed venture capital firm that offers the prospect of rich, private equity-like returns, but all the usual associated risks of costly failures.
Founded in 2006 as Esprit Capital by Simon Cook and Stuart Chapman, it joined a global venture capital network set up by the silicon valley investor Tim Draper a year later. Having acquired businesses including 3i’s European venture arm, it renamed itself Draper Esprit in 2015 and listed a year later on the Aim at 300p a share.
Its mantra is to invest, and often re-invest, in “high-growth digital technology businesses” in Europe, taking stakes in unquoted companies to get in on the next success early.
Its core portfolio looks interesting. High up it is Graphcore, which makes the chips that lie at the heart of artificial intelligence. In a December fundraising that Draper Esprit took part in, it was valued at $1.7 billion. There is also Trustpilot, a review website; Lyst, the fashion search site; and Revolut, the financial technology business.
Having gone to investors for £115 million in June, Draper Esprit put £65 million of its funds to work over the six months to the end of September, during which time the value of its holdings rose by 45 per cent. Then came a significant investment in Finalcad, an online system for construction companies which, with builders desperate to go digital, also looks promising.
Its shares rocketed to 645p in August last year, before sliding as much as 23 per cent in the subsequent tech sell-off: they were down 15p at 540p yesterday.
Draper Esprit’s track record is impressive: it has generated an average return of 3.2 times its investment and has only once failed to profit from a position. For equally brave investors prepared to pay a 12 per cent premium to the net asset value for a company that, for now, reinvests rather than pays dividends, this looks very enticing.
ADVICE Buy
WHY High growth and enough diversity to absorb failures
