Deal Builder And Co-Driver AI Suite Will Increase Customer Engagement In Digital Automotive Marketplace

Key Takeaways

• Strategic focus on enhancing Deal Builder and Co-Driver AI suite likely to drive revenue growth and improve net margins through customer engagement and operational efficiency.
  
• Partnership with What Car? and focus on electric vehicles expected to boost consumer engagement and revenue from new car listings.
  
• Increased operational challenges across various segments, including tax effects, stock dynamics, and leasing issues, threaten to impact Auto Trader's overall profitability and revenue growth.

Catalysts

Operates in the digital automotive marketplace in the United Kingdom and Ireland.

• Auto Trader's strategic focus on Deal Builder, enhancing customer integration and engagement, coupled with gradual monetisation of the product, is likely to drive future revenue growth as they scale the number of clients and stock listings.
  
• The upcoming enhancements and expansion of the Co-Driver AI suite, aimed at streamlining inventory management for retailers, is expected to increase operational efficiency, thereby potentially improving overall net margins due to cost-saving measures.
  
• The partnership with What Car? and a targeted marketing campaign for new car sales, especially with electric vehicles, may drive an increase in consumer engagement and vehicle transactions, boosting revenue streams from new car listings.
  
• Anticipated rebound in car supply, spurred by resumed new car registrations post-pandemic, could enhance the revenue derived from stock-related services as market dynamics normalise.
  
• Auto Trader's proactive adaptation to the evolving automotive finance landscape, positioning itself as an aggregator, could open new revenue opportunities and improve margin resilience against potential changes in dealer commission structures.

Auto Trader Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Auto Trader Group's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 47.2% today to 48.1% in 3 years time.
• Analysts expect earnings to reach £350.8 million (and earnings per share of £0.39) by about December 2027, up from £279.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £314.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.5x on those 2027 earnings, up from 25.5x today. This future PE is greater than the current PE for the GB Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Auto Trader Group Future Earnings Per Share Growth

Risks

• The digital services tax has led to a contraction in Auto Trader's operating margin, potentially impacting net margins and earnings.
  
• A negative stock lever expectation due to market dynamics implies a potential decline in stock-related revenues, which could affect overall revenue and profitability.
  
• Autorama, a segment of Auto Trader, made an operating loss and the leasing market remains challenged by supply issues, potentially impacting group earnings.
  
• The OEM advertising product is underperforming due to lower quality advertorials compared to competitors, affecting its attractiveness to OEM clients and subsequently impacting advertising revenues.
  
• The shift in retailer mix, with a growth in lower yielding independent and non-car customers, is diluting average revenue per retailer, which could impact net margins and earnings growth.

Valuation

• The analysts have a consensus price target of £8.47 for Auto Trader 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 £10.4, and the most bearish reporting a price target of just £6.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £729.6 million, earnings will come to £350.8 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 7.2%.
• Given the current share price of £8.02, the analyst's price target of £8.47 is 5.4% 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.