My two share picks have a travel theme. The first, Auto Trader (LSE: AUTO), is long-established forum to sell cars and has a successful track record on the stock market. The other, Trainline (LSE: TRN), is a company that only recently joined the market via an IPO. I strongly believe both have huge potential to reward investors and outperform the price of gold.
Like other online platforms such as Rightmove in property, Auto Trader has a dominant share in a niche. This is hugely valuable. Others are trying to compete. Indeed, Zoopla founder Alex Chesterman’s latest start-up is Cazoo, a used car retailer. This new market entrant may try to steal market share from Auto Trader, but I think the latter has such a dominant position it should continue to grow.
It’s estimated that approximately 80% of UK automotive dealers use Auto Trader platforms. It enjoys almost 60m visits per month, with the majority of those visits coming via mobile devices.
The most recent results show the benefits of Auto Trader’s market position. It has a huge – and growing – operating profit margin. It rose to 70% for the six months ended 30 September 2019. It was 68% in the first half of 2019.
The business makes huge amounts of cash, which is the lifeblood of any business. In the second half, cash generated was £132.7m, meaning management could raise the dividend and buy back shares, which is good for the share price.
Compared to car dealerships – whose share prices are really struggling – Auto Trader is doing much better. I expect it to stay in the fast lane and keep posting strong growth.
Unusually for an IPO, the share price of Trainline has been rising since it joined the stock market in mid-2019. The share price has risen by a third.
Driving the share price is huge revenue growth, rising numbers of consumers using a train rather than a car and planning their journeys online, and expansion into Europe.
Like other innovative tech companies, Trainline does operate at a loss, which will put some investors off. But most of the growing costs it has faced relate to the high price of joining the FTSE, which is a genuine one-off cost. It’ll be interesting to see if Trainline can keep expanding rapidly while simultaneously moving towards profitability. If it can pull that off, I think the shares have plenty of potential to re-rate much higher.
Consumers are becoming increasingly used to e-tickets and shopping online for better deals, especially in the travel industry, so Trainline is tapping into a very sustainable and growing trend and that should serve investors well.
I think both of these technology-led companies have better growth prospects than gold. For this reason I’d be very happy to buy the shares of either or both.
Andy Ross owns no share 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.