Will Auto Trader be overtaken by Ebay?
Competition concerns help rev up the pressure on a stalling share price
On 19 October two pieces of potentially negative news emerged to put Auto Trader’s (AUTO) shares in reverse gear.
First the UK’s largest independent car dealership Pendragon (PDG) warned on trading and then online auction site Ebay announced the purchase of Motors.co.uk, creating a bulked-up challenger to Auto Trader’s leading position in the online car listings market.
WHAT HAS HAPPENED TO THE SHARE PRICE?
As a relatively highly-rated company with a technology-linked focus, Auto Trader had already been caught up in the recent market correction and the Ebay news helped extend the losses for shareholders.
At 390.7p the shares are now down around 17% on the highs attained in late September. At these levels the shares trade on a March 2019 price-to-earnings ratio of 20.1-times.
WHO IS MOTORS.CO.UK AND WHAT ARE EBAY’S PLANS FOR THE BUSINESS?
In the six years since being bought by Cox Automotive, Motors.co.uk has doubled its consumer audience and the number of vehicles it advertises. Ebay has now agreed to buy the Motors.co.uk website and make it part of its Gumtree service.
The deal is subject to approval by the Competion and Markets Asthoriy and is expected to complete in early 2019.
ARE THE COMPETITION FEARS WARRANTED?
While Auto Trader attracts 10.3m unique visitors a month and has around 500,000 car listings, the combination of Motors.co.uk and Gumtree should reach 10m and have 620,000 car listings.
However, it is worth unpicking these numbers a bit. Peel Hunt analyst Jessica Pok notes a study by Comscore in January 2018 which showed each visitor of Auto Trader spent on average 74.6 minutes in a month on the site. This compares with 34.8 minutes for Gumtree and 12.7 minutes for all other motoring portals.
Investment bank Berenberg
comments: ‘Ebay already has expertise in autos in Germany with (listings) market leader mobile.de. In the UK, Ebay and Gumtree have historically been more focused on the lower end of the used car market but Motors.co.uk probably brings it more into the mid-market and it’s hard to ignore this is a more viable challenger.
‘That doesn’t spell complete disaster for Auto Trader –
Rightmove (RMV) and Zoopla co-exist in real estate – but it does give dealers something to push back with when Auto Trader comes with its annual price increase.’
This is an important point. Auto Trader has two main ways of increasing revenue and profit. One is to sign up a greater volume of car dealers to its platform. The other is to increase the level of subscription income or average revenue per retailer (ARPR) either by selling additional services or simply by upping its prices.
Auto Trader is a strong brand but a core strength of the business up until now has been its leadership position in the market.
Similar to Rightmove in the property sphere, by having the largest number of listings it becomes the one most checked by prospective purchasers and therefore a must-have subscription-based product for estate agents, or in this case car dealerships.
This has also enabled Auto Trader to consistently boost its ARPR. As Berenberg suggests, stronger competition might put this metric under pressure.
Pok at Peel Hunt comments: ‘We believe the Ebay/Motors. co.uk deal will be approved by the Competition and Markets Authority and could increase competition for Auto Trader in the medium term.
‘However, Auto Trader’s brand has taken years to build to what it is today. In our view, the combination of the three portals only creates a larger pool of listings but not a more attractive proposition for the consumer.’
IS THE PENDRAGON NEWS RELEVANT?
Analysts are split on this question. Liberum’s Ian Whittaker notes Pendragon’s warning was driven by lower new car sales, adding that Auto Trader ‘is essentially used cars (c. 80%) and, while it wants to expand its new car sales, this is not its primary market’.
Pok at Peel Hunt reckons the state of the new car market is more concerning than the Ebay move, pointing out that stock growth for Auto Trader is driven by more part-exchanged used cars coming on to the market.
HOW WILL AUTO TRADER RESPOND?
We won’t have too long to find out as the company will be under pressure to address both issues when it reports half year results on 8 November.