Here’s the next FTSE 100 stock I’m going to buy

Auto Trader (LSE: AUTO) is a FTSE 100 My stock has been on my watch list for a few months now. It’s down 28% over the past year, though it’s only down 6% over the past six months. I don’t think that’s too bad considering all the gloomy forecasts for the UK economy in recent months.

That’s how I ended up buying some shares.

Market leader

Auto Trader operates the UK’s largest online marketplace for buying and selling vehicles. Most businesses are classified ads, even if they sell value-added services to their customers.

The site has over 450,000 cars on any given day, giving buyers access to over 80% of the UK’s automotive retailers. Two out of every three partner used car sales will be made from the platform by 2021.

Companies benefit from the network effects that scale generates.

Data-driven

Auto Trader has developed its technology team greatly in recent years. These developers are employees (not contractors), who management believes has a vested interest in the long-term performance of the company’s products. They ‘own’ the codebase, it seems, rather than looking for quick fixes.

Catherine Faiers, COO Trader Auto, said: “We have a great software stack, which allows us to be agile. I see that as our biggest strength – more than our brand, history and other assets.”

The group monitors more than 1.9m vehicles every day. It can provide real-time feedback to retailers about the speed at which cars are sold and their value. This can lead to more sales and increased profits for partners.

Auto Trader’s large amount of data gives a clear competitive advantage.

Trading is strong

Full year 2022 revenue (year ending March 2022) is £432m, which is a 65% increase on the previous year. However, the previous trading year was disrupted by Covid. So it is more appropriate to evaluate growth over two years.

If we do this, profits will increase by 17% in 2020 (£368m). Operating profit was £303m, also representing an increase of 17% from 2020. I am encouraged that profitable growth continues to exceed pre-pandemic levels.

The stock currently has a price-to-earnings ratio (P/E) of 20. It is priced lower than in previous years. In addition, there is also a low dividend with a yield of 1.6%.

price power and risk

Being able to raise prices over time without losing customers is one of the hallmarks of a strong business. Proof of Auto Trader’s pricing power is demonstrated by monthly average per retailer growth (ARPR).

That’s the average monthly amount every professional car dealer pays the platform. And it has risen from £996 in 2012 to £2,210 in 2022.

However, car dealerships operate in a highly competitive market, often with low profit margins. So a company can’t afford to keep underestimating customers who have been there forever. You need to use data more creatively to provide additional value to your customers.

Additionally, demand for used cars may decrease during a recession. But in the long term, I expect car buying to continue to move online. As an established and trusted digital platform, Auto Trader should continue to benefit from this transition.