Will Auto Trader be over­taken by Ebay?

Com­pe­ti­tion con­cerns help rev up the pres­sure on a stalling share price

Shares - - CONTENTS DISCLAIMER -

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.

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