During a week when the FTSE 100 has moved modestly higher, the Auto Trader (LSE:AUTO) share price has led the way. It’s up 9.35% so far this week, making it the best performing stock within the index. There are several reasons that I can point to for this move, ranging from company-specific factors to more general economic reasons.
Auto Trader is a UK-based online car marketplace. Private sellers along with registered dealers list new and second-hand cars on the platform. It primarily makes money from the advertising fees charged.
The company has been performing well, not just in the short term. The Auto Trader share price is up 16% over a one-year period. The gains are backed up by the preliminarily full-year results that were released this time last week.
Results showed a 29% drop in revenue. This was down to several months of free advertising offered during 2020 in order to ensure listings on the site. This ultimately trickled down to a 37% fall in profit before tax. However, even with the hit, the company managed to generate a profit of £157.4m. This is largely thanks to the high operating profit margin of 61% that Auto Trader has.
However, one risk to me buying shares now is the fact that any further pandemic restrictions might see free advertising being brought back. I don’t think this strategy is sound and it would further damage revenue in 2021.
It can often take several days for the market to fully react to the release of results. So one reason why I think the Auto Trader share price is up this week is due to investors deciding to buy after the weekend.
Other factors driving the Auto Trader share price
Aside from past information, I think the Auto Trader share price is moving higher based on future expectations. Heading into the summer and beyond, there is no need to offer free advertising. Revenue will naturally increase relative to 2020 due to this. Add to this the fact that lockdown has been eased and car traffic is increasing.
With people likely to be more confident in the future than a year ago, I think more people will decide to buy or sell a car than last year. In a similar way to the property market last summer, I think there is a lot of pent-up demand in the car market. As the go-to marketplace, I think Auto Trader is primed to take advantage of this business.
A more subtle reason for the rise in the Auto Trader share price could be due to the lack of debt. It’s one of the few FTSE 100 companies that currently doesn’t hold any debt.
This is important as the latest inflation figures out this week showed a rise to 2.1%, above the Bank of England’s target rate. Therefore, interest rates could increase to temper this inflation, which is a negative for companies with high debt levels. As Auto Trader doesn’t have debt, it can be seen as a safer investment.
Overall, I think the move higher in the Auto Trader share price is justified this week, and I’m considering buying shares.
jonathansmith1 does not hold shares in any company 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.