We Will Expand Our European Network And Upgrade Our Platform

Key Takeaways

• Expansion of the sourcing network and technological investments are expected to drive revenue growth, better margins, and gross profit in the long term.
  
• Strong cash reserves and no corporate debt provide flexibility for growth initiatives, enhancing future earnings and stock valuation.
  
• Increased operational expenditures and seasonal weaknesses might impact AUTO1's profitability, with short-term losses expected despite breakeven in segment profitability for Autohero.

Catalysts

A technology company, operates a digital automotive platform for buying and selling used cars online in Germany, France, Italy, and internationally.

• AUTO1 Group's strategy of expanding its sourcing network by opening 61 new branches in Europe during Q1 2025 is expected to increase vehicle selection for buyers and convenience for sellers, likely boosting future revenue growth.
  
• The impressive growth of the merchant financing portfolio, which expanded by 2.6x to €258 million year-on-year, supports organic business growth for partners, potentially enhancing future net margins as financing becomes a more significant part of the revenue mix.
  
• Investment in technological advancements and continuous platform improvements are driving higher demand and better pricing, contributing to better margins and gross profit, which should positively affect earnings in the longer term.
  
• AUTO1's commitment to its long-term group margin target of 5% to 9%, up from reaching 3% in Q1 2025, implies operational efficiencies and economies of scale are expected to drive improved net margins over time.
  
• The company's strong cash position, with €601 million and no corporate debt, provides the financial flexibility to fund growth initiatives and investments, which can drive higher future earnings and potentially improve stock valuation.

AUTO1 Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AUTO1 Group's revenue will grow by 12.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 2.2% in 3 years time.
• Analysts expect earnings to reach €205.4 million (and earnings per share of €0.92) by about July 2028, up from €54.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €162.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.4x on those 2028 earnings, down from 100.8x today. This future PE is greater than the current PE for the DE Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

AUTO1 Group Future Earnings Per Share Growth

Risks

• The management indicated that Q1 is typically the company's strongest quarter and benefitted from aggressive purchasing and inventory build-up from Q4, suggesting that future quarters may not match the same level of performance, potentially impacting net margins and profits.
  
• The company is planning increased operational expenditures, particularly in marketing and staffing at Autohero, which may result in higher OpEx per unit for the remainder of the year, potentially impacting net earnings and profitability in the short term.
  
• AUTO1’s top management acknowledged that Q2 is seasonally a weaker quarter, exacerbated by holidays in April, May, and June, which could lead to a sequential decline in merchant units and group profitability, affecting revenues and earnings.
  
• Although Auto1 has reached breakeven in segment profitability for Autohero, the company plans to enter a higher investment mode which may result in short-term losses for the segment, impacting overall earnings.
  
• The reliance on merchant financing accounts for a relatively small part of the merchant GPU and there are risks associated with merchant loan defaults (currently 2%-3%), which could negatively impact net margins and profits if defaults increase.

Valuation

• The analysts have a consensus price target of €25.885 for AUTO1 Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €30.0, and the most bearish reporting a price target of just €14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €9.5 billion, earnings will come to €205.4 million, and it would be trading on a PE ratio of 34.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of €24.9, the analyst price target of €25.88 is 3.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.