Everything has a natural — or unnatural — ceiling. Britain’s booming market for new cars looks like it has finally hit one. After a few record-breaking years, turbocharged by cheap finance deals, sales are slowing amid weaking consumer confidence and Brexit jitters.
The car market has not been normal for a while. Manufacturers have used record-low interest rates to stimulate sales artificially. Now the SMMT trade body reckons new car sales will fall by 5% this year.
This pessimism has held back the shares of Auto Trader, the website that dominates used-car sales. Guardian Media Group sold its majority stake in 2014 to private equity partner Apax, which promptly flipped on to the stock market in 2015 for a hefty profit. Its days as a magazine are long behind it. It has become the default website for dealers and private owners. It is four times the size (by website visits) of its next-biggest rival, Gumtree. Where once you advertised your Ford Fiesta in the back of the local paper, today you pay about £47 for an Auto Trader slot.
Its shares have struggled since last June’s Brexit vote, only recently clawing back their losses and lagging the FTSE 250’s growth.
Investors worry that falling new car sales will force the closure and consolidation of the dealerships who buy the bulk of its ads. They fear a glut of three-year-old ex-lease cars hitting the market at once will depress dealer margins — and hurt Auto Trader’s ability to raise prices. They fret that a clampdown on cheap finance will curb demand for used cars, and worry about new internet rivals. A move to driverless cars could take a huge bite out of the market.
None of this is guaranteed. The car market is a bit like a balloon: squeeze one bit and another part bulges. Even if new car sales fall, used cars still need to be sold. Buyers seem hooked on changing their car every three years.
Auto Trader is also making it harder for dealers to ditch it by offering innovations such as live chat and the ability to part exchange. A small area of its business — advertising new cars for manufacturers — could become substantial as the likes of Ford and Citroën try to attract buyers online.
As a tech stock, Auto Trader is expensive. It trades on a multiple of almost 30 times last year’s predicted earnings. Its market value of £4.3bn is eye-watering, especially set against predicted profits of £203m on sales of £310m. Its 65% margins look almost too good to be true. Dealers may not like its grip on the market, but there’s little they can do. Buy.
