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Will the Auto Trader share price rally more? Here’s what I think

Image: Auto Trader

It has been a great week for Auto Trader (LSE: AUTO) at the stock market. The FTSE 100 e-marketplace for automobiles has seen a 13% increase in share price in a week. That it is up around 17% over the year, puts the extent of this rise in context.

Yesterday alone, it rose by 6.6%. The Auto Trader share price is now at all-time highs. 

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The latest increase follows the release of its full-year results for the year ending 31 March 2021. At first glance, it could appear surprising that the Auto Trader share price responded so swiftly and positively to clearly weak numbers. Its revenue fell by 29% and pre-tax profit was down 37% compared to the year before. 

Positive about the current year

The reaction, in my view, is not to what has happend but to the improved outlook for Auto Trader. As I went through the results, two statements stood out. One, that the pandemic is having little impact on its financial performance for the current year, at least so far. As the economy picks up further during the year, I reckon that the company can continue to perform. This is particularly because travel is now possible again after over a year of confinement. For the 12 months to March 2021, new car registrations fell by almost 25%, which could change. Also, low interest rates could encourage consumers to buy cars. 

Robust long-term prospects

Two, it expects to be a beneficiary of the shift towards online buying for cars over the long term. A version of this statement was also made by CEO Nathan Coe, who said that “There has been a dramatic shift towards buying online, which means we now have more buyers than ever turning to Auto Trader”

I am a believer in the potential of the online industry. The number of companies that rely on technology for sales will only grow over time. This is especially so for multinationals, which are expanding into newer markets. This is why I hold shares of companies like Ocado, Rightmove, and Deliveroo. Auto Trader can be seen under the same umbrella. Much like Ocado is an e-grocer and Rightmove is a property e-marketplace, Auto Trader is an e-auto seller. So over the long term, I think it could be a good buy for my portfolio. 

Possible pandemic impact for the Auto Trader share price

I will keep an eye out for any ongoing impact of the coronavirus on its future numbers. The pandemic is not over yet. And auto sales come under discretionary demand. This means that consumers will cut back on these purchases first if there is a surge in Covid-19 again. 

Also, to me, the sudden share price increase looks unsustainable. The Auto Trader share has merit, without a doubt, but I think its share price will fall from the current highs. I think then will be a good time to buy the stock, even with the continued pandemic risk. 

I would buy it on a dip.

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Manika Premsingh owns shares of Deliveroo Holdings Plc, Ocado Group, and Rightmove. The Motley Fool UK has recommended Auto Trader, Ocado Group, and Rightmove. 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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