While FTSE shares are enjoying an impressive rally, there are still plenty of value stocks for investors to potentially capitalise on. And among these stands Autotrader Group (LSE:AUTO).
After taking a painful 37% tumble over the last six months, the online automotive marketplace is now trading at a price-to-earnings ratio of just 14.5. That may not immediately sound like the shares are in value stock territory. But it’s the cheapest P/E ratio seen for Autotrader shares since its IPO in 2015!
Could this be a screaming buying opportunity for long-term investors?
What’s going on?
It’s one of the most profitable companies on the entire London Stock Exchange with net margins sitting at over 47%. So it’s a bit odd to see Autotrader shares take a tumble. But investors appear to be less concerned with profit margins and more with growth, or rather the lack of it.
In its latest interim results for fiscal 2026 (ending in March), revenue, operating profits, and cash from operations all ticked up by 5%, 6%, and 7% respectively, to record highs.
That’s certainly an encouraging sign. But it’s crucial to point out that single-digit growth for a business that’s historically and consistently achieved strong double-digit expansion isn’t what investors like to see. And it’s the slowdown that has analysts on edge.
But digging deeper, the pullback in price might be a bit overblown. The lacklustre growth isn’t being caused by competitive pressure or a lack of platform demand. In fact, Autotrader’s platform continues to be a near-monopoly, controlling over 75% of the online car purchasing market.
Instead, the problem lies in supply and demand dynamics. New car sales remain relatively weak due to ongoing economic challenges. Instead, demand for cheaper used cars has skyrocketed.
The only problem is that with the supply of used cars running thin, dealerships don’t need to spend as much money promoting their listings on the Autotrader platform. As such, management’s ability to upsell its premium marketing packages to customers is currently limited.
Bull versus bear
The threat of a slowdown is real and has already started emerging in the group’s financials. But at the end of the day, supply and demand dynamics are ultimately cyclical. And with Autotrader maintaining its industry-dominant position, growth will most likely return when the cycle shifts back in a more favourable direction.
Of course, the exact timing of when this recovery will happen remains a mystery.
There are also some valid longer-term concerns, particularly when it comes to electric vehicles (EVs). The used EV market is proving to be quite tricky, with consumer concerns about residual car values and battery longevity.
As such, dealerships are already reluctant to stock second-hand EVs. And if this pattern continues, there could be a long-term structural shift in the used car market that adversely impacts Autotrader’s business.
Where does that leave investors? Autotrader shares look like they’ve been overly punished. As interest rates steadily drop and car financing options become more affordable, the new car market should start heating back up. That should create stronger demand for customers to promote their listings.
The longer-term dynamics of the used car market need to be watched closely. But with the share price seemingly already pricing in catastrophe, the risk-to-reward ratio looks favourable to me and worth further research.
