Auto Trader could be a monster stock in the making
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Auto Trader (LSE: AUTO) had a tough pandemic. 2020 saw the share price plummet from around 590p to 380p as lockdown hit – a fall of nearly 35%. But its recovery has since been strong, thanks in part to pent up demand for cars. The Auto Trader share price hit a five-year high of 660p in July, and is now sitting at 590p. Could this be a monster stock in the making?
Energy crisis
It’s not just the share price movements that have caught my eye, its Auto Trader’s long-term prospects.
Firstly, the energy crisis could spell a big opportunity for Auto Trader. I recently read that it takes almost a tonne of steel to make a new car. High energy prices are making steel production so unaffordable that plants are at risk of shut-down, meaning production of new cars could grind to a halt.
Almost 90% of the cars traded on Auto Trader are used. Does this have the potential to turn Auto Trader into a monster stock if new car shortages emerge?
I’m not so sure. Can we really assume that demand for used cars will continue to soar? There were news reports about huge pent up demand in the spring as lockdown eased. But seven months down the line, has this worked its way through?
Rate hike
Reports also emerged last week that the Bank of England is considering raising interest rates – and that this could happen as soon as the end of the year. I suspect that this could leave consumers less willing to purchase cars on finance deals, as repayments get more expensive. These are a key offering of the Auto Trader platform, meaning that higher interest rates could hit its profitability going forward.
Fuel shortages are still rumbling on too, rendering car travel more unpredictable. Is there too much uncertainty for customers to consider buying a new car at the moment?
Electric future
Despite these risks, I think that Auto Trader could still be a good long-term bet, thanks to its clever positioning in the electric car market.
Last weekend, Auto Trader announced that searches for electric vehicles hit their highest ever levels, thanks to motorway protests and fuel shortages dominating the news.
Its website reveals a dedicated section for electric car shopping, and its Annual Report also lists the move to electric as the number one strategic priority.
A monster stock?
The combination of a new car shortage and higher demand for electric cars could leave Auto Trader exceptionally well placed – and its Annual Report suggests it is thinking along the same strategic lines.
But there are clear risks too – could higher interest rates suppress car demand? And could fuel shortages reduce demand for driving all together?
Perhaps Auto Trader is more of a cautious long-term bet for my portfolio than a monster stock.
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Hermione Taylor does not have a position in any of the shares mentioned.
The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.