Here at the Motley Fool, our investment philosophy has always been to find fundamentally sound companies who have good long-term prospects and that can hopefully realize gains over several years.
Short-term fads come and go (thinking of the Bitcoin rally as just one example) but a quality company can offer a shrewd investor longer term appreciation. With that in mind, it has been four and a half years since Auto Trader (LSE: AUTO) listed and went public.
At the time, and since then, various of my Foolish colleagues have written of the merits of the company, giving advice that they would buy into the company. So if you had taken the advice back in 2015 and invested £1,000, how would you have fared?
While my car puns my be disappointing, the share performance of Auto Trader since the IPO is certainly not. It listed at 265p, and has over doubled returns to currently trade at 570p. To be precise, it has a 115% return, meaning your £1,000 would have turned into £2,150.
Indeed, since the IPO in March 2015, the share price has never seen a significant drop and has never traded below the initial price it launched at. Poor months have seen a drop of 10% to 15%, which is not a bad monthly draw down figure. On the flip side, it returned 26% last year in share price growth, and is on track to be up 28% for 2019.
The growth in the market capitalization of the firm saw it enter the FTSE 100 at the beginning of this year when the market value of the firm passed £4.2bn. Considering the business has a relatively simple business model of being a ‘car supermarket’ for used and new cars, this is undeniably a great feat. But where to from here?
Running out of gas?
The incredible growth in the company has been reflected in the share price rise from the IPO. In the latest figures out from the firm for the first six months of this year, it reported revenue increases of 8% and profit increases of 12%. These figures are very strong and I cannot fault them, but you do have to wonder whether this growth can be sustainable into the future.
One reason why it could still be viable is that the elasticity of demand for used cars is fairly low. What I mean is that the stock is not really cyclical in nature (unlike the new car segment of the market). Should we see a recession, new car sales would likely fall, but used car sales would not fall as much.
This ‘inelastic’ nature of the market should support Auto Trader and the business model it follows, even if we do see a recession in the next 12 to 24 months.
Overall, the returns from investing in the Auto Trader IPO are very strong. While some may question whether the rally can be sustained going forward, I think the low drawdowns seen previously should give investors confidence to stay invested, along with the low elasticity which the used car market has.
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Jonathan Smith does not own shares in Auto Trader. 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.