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The Auto Trader share price is surging! Is this a top stock to own?

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A man opens a car boot
Image: Auto Trader

The Auto Trader (LSE:AUTO) share price erupted this morning after the company released its half-year results. Today’s double-digit gains have helped elevate the stock far beyond its pre-pandemic levels. And now its 12-month return for shareholders stands at a respectable 20%.

So what was in this report that excited investors? And should I be considering it for my portfolio? Let’s take a look.

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Auto Trader’s share price surges on impressive earnings

To say these results are positive is a bit of an understatement. The online automotive marketplace just reported its highest half-year earnings in the history of the business.

Revenue jumped 82% compared to a year ago, landing at £215.4m. That’s even higher than its pre-pandemic sales of £186.7m. What’s more, this skyrocketing top line also propelled the bottom line.

Operating income came in 121% higher than a year ago. And profits were further bolstered by recovering margins which returned to around 70% after the pandemic pushed them down to 58% last year.

How did it pull it off? Looking at the operational side of the business, total visitors reached 68.7 million. And the time spent by prospective customers on the platform also increased by a notable 14%.

With the adverse effects of Covid-19 on the economy starting to wane, it seems more people are happy to start spending large chunks of cash on buying a new(er) cars. As such, the average monthly revenue per retailer on the platform has jumped from £1,206 to £2,199.

Needless to say, this is excellent news for both the company and the vehicle retailers using the platform. So I’m not surprised to see the Auto Trader share price explode today.

The risks that lie ahead

As exciting as this report is, the company still has several threats to overcome. The most immediate of which appears to be inflation. Last year, governments around the globe started issuing stimulus cheques to keep their respective economies functioning during the lockdown period.

But with economies flooded with excess cash, inflation is now on the rise. Whether this is temporary or a long-term issue has yet to be seen. Either way, it could put a halt to Auto Trader’s recent performance.

How so? Higher inflation can be beneficial for some industries. But for consumers and automotive dealers, it can be a nightmare. Rising car prices will likely push more people to become more reliant on a financing option.

The problem is, as the central banks try to keep inflation in check, interest rates are likely to rise. This makes the cost of borrowing money more expensive. And it could reach a stage where many people are simply unable to afford a car, even on finance. That’s obviously bad news for car retailers and, in turn, the Auto Trader share price.

Time to buy?

The threat of rising inflation is a concern. But looking at the historical performance of Auto Trader’s business, I think it’s a challenge management can face. So despite the risk of a potential slowdown, I am considering this business for my portfolio.

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Zaven Boyrazian has no 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.

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