Unsurprisingly, there weren’t many high growth tech companies founded in 1976. However, there are a couple of unique examples.
In Cupertino, California: Apple.
And in Reading, UK: Auto Trader.
OK, maybe not quite the same! However, despite its print legacy, today’s Auto Trader is a bona fide online marketplace, arguably the Rightmove of cars, and investors are increasingly treating it that way.
After years of changing hands as a private company, Auto Trader IPO’d in 2015 with a market cap of £2.35B. Since then it’s doubled to a valuation of £5.4B as of May 2019.
But even before that Auto Trader had a crazy road to the public markets, becoming a household name and a major company years before it reached everyday investors (including customers on the Freetrade app).
Let’s hit reverse!
In 1976, Auto Trader was founded as a simple listings magazine by businessman John Madejski.
While on holiday in Florida, John randomly saw a commercial magazine that featured pictures of cars for sale. Like many great UK entrepreneurs before him, he said to himself, “Wow, we are so behind on stuff” and promptly cloned the idea for the British market.
Initially called Thames Valley Trader, originally people could list all sorts of things: cars of course, but also houses, aircraft, a pair of trousers. However, cars were by far the most popular items. They renamed the magazine Auto Trader and concentrated on listing vehicles, both new and secondhand.
The 1980s were an era of excess as well as increasing wealth in the suburbs, so car sales were rising faster than ever. That meant a lot of people using Auto Trader.
With the reshaped magazine growing fast, in 1982 John entered into what turned out to be a very effective partnership with Guardian Media Group (GMG), the owner of the newspaper.
Funnily enough, while The Guardian newspaper tends to put principle and journalistic integrity ahead of commercial concerns, the Guardian Media Group is a keen-eyed, pragmatic, deal-making machine!
The GMG didn’t just invest into the magazine. They also nurtured the company with advice and guidance, as well as a superb distribution network.
In 1996, Auto Trader launched a website alongside the magazine - this later proved to be a wise move.
In 1998, John sold off his remaining stake in Auto Trader to a private equity firm for £174m.
Already the owner and chair of football club Reading FC, he continued to focus on the club along with a portfolio of various companies and properties. He actually hasn’t done so well recently and in the last few years his net worth has dwindled by about £300m to £100m now.
Eventually he sold Reading FC to a pair of Hong Kong entrepreneurs.
But he does still have a stadium named after him, which is nice.
Back to 1998: Auto Trader kept on rolling.
Co-owned by the private equity firm and the Guardian Media Group, the latter merged Auto Trader with a collection of other acquired similar titles to create Trader Media Group and establish a near-monopoly on the UK cars listing market.
Then GMG fully bought out the private equity firm in 2003 to become sole owners.
The Guardian years
Over the next 10 years, Auto Trader was the financial engine of Guardian Media Group. While The Guardian racked up losses for years trying to navigate the new landscape of online media, Auto Trader’s steady cash flow kept the lights on at Guardian HQ.
In fact, Auto Trader felt the impact of new media too - their print circulation peaked in 2000 and the magazine was shuttered in 2013. However, their early foray into online sales kept the business performing extremely well.
There’s a neat irony that a progressive paper which took a lead on climate reporting was subsidised by an auto-sales business for so long.
Eventually, financial pressures on their news media pushed GMG to sell stakes to a new private equity firm, Apax Partners, until they finally sold out of the whole business in 2014 for £600m at a valuation of £1.75B.
Apax then quickly took the business public at a valuation of £2B.
The lesson here? Private equity firms know how to make an exit.
The Rightmove of cars
Now a public company, Auto Trader has become a fully fledged tech firm and Britain’s largest, most sophisticated car-buying portal.
Let’s dive into what their business looks like today.
Auto Trader dominates car sales in the UK.
They list vehicles from professional dealers and private sellers, as well as new cars fresh from manufacturers. The new and secondhand car markets have distinct economic drivers and customer bases, so Auto Trader are to an extent diversified in the auto sales industry.
Just like Rightmove’s main customers are estate agents, not buyers, Auto Trader’s direct customers are car dealers. The high quality of their dealer platform is a big advantage. As well as simply having the biggest audience, they also offer rich data, video and sophisticated advertising options for dealers.
After receiving a particular FCA authorisation, they can even let car dealers show off their financing calculators on the site itself.
The numbers are also pretty strong. In the financial year ending June 2018:
- Revenue was up 7% to £331m
- Their average revenue per retailer/month rose £149
- Operating profit up 10% to £220m
- For a very healthy operating margin of 67%
They’re growing sales, growing profits and better monetising their sellers.
The company still carries a fair whack of debt from its private equity firm days (many PE firms love taking on debt on their companies), but strong cash flow means that they’ve been steadily reducing that. Their debt shrunk by £16m to £338m last year.
That said, from a price to earnings point of view, Auto Trader is not a bargain. Right now (31/05/19), Auto Trader’s PE ratio is 33. For comparison, Rightmove’s PE ratio is 31.85 (31/05/19).
So as a UK internet marketplace, Auto Trader isn’t the hidden gem it used to be.
The car market slowing down?
You would expect that with increasing climate concerns and motoring costs, car sales would have dropped precipitously. And to an extent, they have.
Last year saw the biggest drop in UK car sales since 2008 - 6.8% - driven by increased motoring costs, Brexit worries and environmental consciousness. New car sales are down from a peak in 2016 and the company expect them to drop further.
However, there are still opportunities for growth in the car market, for instance if drivers swtich to electric vehicles faster than they would otherwise replace their vehicles. The number of UK drivers considering an electric vehicle nearly tripled from 25% to 71% according to research from the company itself.
The total number of car registrations grew last year, so the car market is growing but at a slower rate than before.
Nonetheless, serious climate issues and resulting policy change could have a more radical impact on sales.
Since the sale of its last overseas businesses in 2013, Auto Trader have been solely UK and so they have particular exposure to the UK economy including everyone’s favourite B-word.
Even more-so than property, a car marketplace has a lot to worry about from Brexit. The UK car industry is notoriously dependent on imports, open trade and foreign manufacturers.
Tariffs and trade barriers could increase car prices and any Brexit downturn could dent consumer confidence. Both of these would sap demand for cars, meaning fewer views and sales for Auto Trader.
Depending on the severity of Brexit, the car market could face a serious decline.
Big marketplaces are notoriously hard to break. Audiences draw inventory, which draws audiences in a cycle as old as time. However, it can be done by a disruptive enough platform.
More niche competitors like guaranteed buyers WeBuyAnyCar have found a market with private sellers, but they’re irrelevant to the big professional dealer network who won’t take a heavy discount for convenience.
Auto Trader’s biggest vulnerability comes from their dominance. Their near-monopoly with dealers has led to some criticism over pricing fairness. In 2011, there was a petition from a dealer group proposing a mass pullout in response to price increases.
Right now, Auto Trader still has a firm grip on the market. However, if a shiny, new platform arrived offering a disruptive model for dealers, better prices and better tech, that could change. There’s little on the horizon though!
Auto Trader are a high margin internet marketplace with a dominant position over a near-universal market. They have a quality, cash-flow positive business and a track record of innovating from within. Their biggest risk is probably their pure UK exposure in the context of Brexit.
Aside from that risk, the other issue is that the cat’s clearly out of the bag relative to a couple of years ago and the stock is now priced similarly to other marketplace businesses. The mega-growth in share price of the last few years won’t necessarily repeat itself.
However, if you’re looking for a UK tech business with a firm handle on profits you might well consider this 43 year old banger!
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