Why this AI stock in the FTSE 250 looks cheap to me

Jon Smith explains why a popular online marketplace is making use of AI and why the stock could outperform in the coming years.

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Artificial intelligence (AI) has been the hot theme of 2024 so far. More and more companies are pivoting towards being included as AI stocks as the management teams get onboard with new tech. Of course, not all sectors stand to make huge benefits from AI. But others will, with one FTSE 250 stock catching my eye with progress in this area.

Revamping a traditional business

The stock in focus is Auto Trader (LSE:AUTO). The online vehicle marketplace operates a fairly straight forward business model. As a user, I can go and list my car for sale and get charged a listing fee. If I sell my car, great. As a buyer, I can browse a wide range of vehicles that fit my requirement and hopefully find one to purchase.

By being the middleman, Auto Trader makes money from the listing fees, alongside advertising and charging a premium service for professional dealers.

You might think that there’s no way that AI fits in here. Yet in a piece written last summer, the firm revealed they have been using AI for over a decade. This includes the use of “you may also like…” and price flags to find the right cars. It’s also been used to provide pricing recommendations based on how long cars at a price take to sell.

The future’s bright

What’s more exciting is the future outlook for AI at Auto Trader. This is key because this has the potential to really increase the share price. Over the past year, the stock has jumped by 19%. Some of this can be put down to the good financial results. Yet I feel a portion of this reflects the excitement around AI.

Things could really accelerate. For sellers, a much more automated process for listing vehicles will help to save a lot of time. For buyers, enhanced recognition of what a user wants will help them to find the best vehicle quicker. Packaged together, AI will help Auto Trader to generate more revenue in a more efficient and user friendly way.

Of course, the risk is that this will cost a lot of money and needs to be implemented well in order to take off. Yet based on the recent half-year report, the firm has plenty of firepower. The adjusted EBITDA was £182.1m. Even after paying out some as a dividend, there’s plenty of retained earnings to invest into AI.

Cheaper, based on the future

I think the stock looks cheap when factoring in the benefits that AI could provide in the future. Used car sales hit a five-year high in Q1, at almost 2m units. With AI enhancements, I think Auto Trader could take a much larger market share of this.

Not only should top-line revenue grow from this, but long-term costs should be lower as the business becomes more efficient.

I’ll have to wait for more information on how exactly Auto Trader plans to push ahead with using AI. Yet I think being an early bird investor makes sense. Therefore, I’m thinking about buying the growth stock shortly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader Group Plc. 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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