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Here’s why the Auto Trader share price jumped 20% in November

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Image: Toyota

Auto Trader (LSE:AUTO) was one of the top performing FTSE 100 stocks during November. In contrast to shares that fell sharply, the Auto Trader share price rallied 20% last month, heading from levels around 600p to 732p by the end of the month. A lot of this move came in one day in the middle of November. So what were the drivers behind this move?

Results indicate a positive outlook

The main reason for the spike on the one day was the release of the half-year results. The deck opened up with the powerful statement that said “we have achieved our highest ever six-monthly revenue and profits”.

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That in itself is reason enough to see a jump in the Auto Trader share price. Yet the benchmark that was set also bodes well for the future outlook as well. This is because the business model of the online car marketplace is largely based on recurring revenue. With retailer numbers at record levels, strong results now suggest that the performance can continue to be strong into 2022. 

So with investors realising the above, the shares continued to push higher on the day. Importantly, these gains were held as the share price remained elevated above the 700p level.

Strong numbers and dividends

Aside from the positive outlook, the financials also helped to elevate the Auto Trader share price in November. Revenue grew by 82% on the previous six months, to £215.4m. In terms of operating profit, it increased by 121% on the previous period to £151.7m.

Partly as a result of the strong figures, the business was able to announce in November an interim dividend. At 2.7p per share, the dividend yield is only 1.05%. Yet considering the dividend cut last year, it’s definitely a step in the right direction. If a larger dividend per share is announced in 2022 then income investors will be taking note.

So I feel that some of the move higher in Auto Trader shares last month was down to the positive sentiment around the earnings and also the dividend potential.

Future direction for the Auto Trader share price

From here, the trend in the share price does appear to be moving higher. Over a one-year period, the shares are up 29%. The gains are positive over two, three and five-year periods as well. It’s clear that holding the stock for the long term historically would have yielded good results.

Past performance doesn’t guarantee future returns though. One risk is that the stock hit all-time highs earlier this week. It also has a price-to-earnings ratio of 55, well above the FTSE 100 average. This could indicate that the stock is actually overvalued, especially after the rise in the share price during November.

Personally, I’d prefer to see a bit of a retracement in the share price before buying any shares, as I do think it looks a little expensive right now.

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Jon Smith has no position in any 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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