Auto Trader Group: A Valuation Crossroads Amid Supply Constraints and Earnings Uncertainty

The UK's leading automotive marketplace, Auto Trader Group, has long been the poster child of digital disruption in traditional industries. Yet beneath its glossy platform and recent earnings gains lurks a critical question: is its valuation sustainable in a tightening used car market? With a P/E ratio of 28x trailing earnings—nearly double its 7.8% annual earnings growth rate—the company faces mounting pressure to justify its premium pricing.

The Valuation Dilemma: Growth vs. Multiples

Auto Trader's P/E ratio has consistently outpaced its earnings trajectory. While its 2025 revenue grew 5% to £601 million, the stock price dropped 14% post-earnings—a stark reaction to what investors perceived as lackluster execution. The disconnect becomes clearer when comparing its P/E to peers: Sabio Holdings (-5.29x) and BBTV Holdings (10.89x) trade at far lower multiples. Even DGTL Holdings (0x P/E) underscores the sector's skepticism toward overvalued digital players.

The math is stark: at 28x earnings, the stock demands 14% annual earnings growth for a decade just to justify its current price. Yet Auto Trader's historical growth has averaged just 7.8%—a gap that grows wider when considering slowing used car sales.

Supply Constraints: The Elephant in the Garage

Auto Trader's revenue model hinges on a thriving used car market. Here, the outlook is grim. Supply bottlenecks—driven by post-pandemic chip shortages and rising regulatory hurdles—are squeezing inventory. Auto Trader's core “Retailer Forecourts” metric grew only 2% to 14,013 in FY2025, while vehicle listings increased just 1% to 449,000. With fewer cars to list, the company's ability to extract premium advertising fees is under threat.

Autorama, its luxury car platform, offers a warning sign: its revenue plunged 12% to £36.3 million as high-end buyers retreated. Even the flagship Auto Trader division saw Average Revenue Per Retailer (ARPR) grow only 5% to £2,854—half the pace of 2021's 111% surge.

Earnings Growth: A Losing Race Against Valuation

Analysts have already begun revising forecasts downward. While Auto Trader projects 5-7% retailer revenue growth for FY2026, this assumes stabilized stock levels and AI-driven efficiencies—a bet that hinges on factors outside its control. The Digital Services Tax (DST) also looms: a £10.2 million charge in FY2025 already pinched margins, and further regulatory headwinds could erode profitability.

The recent 14% share price drop post-earnings suggests investors are losing patience. Yet the stock's recovery to 50% of its March 2023 high signals a market still divided on its prospects.

The Bottom Line: Wait for a Better Entry Point

Auto Trader's story is far from over. Its AI tools like Co-Driver and Deal Builder are innovative, and its 75% market share in automotive minutes is a fortress. However, the 28x P/E multiple demands perfection—a tall order in an industry facing supply crunches and regulatory scrutiny.

Investors should tread carefully. While the post-earnings dip may tempt contrarians, the company's fundamentals warrant a wait-and-see approach. A pullback to a 20x P/E—or clearer signs of margin expansion—would be prerequisites for conviction. Until then, Auto Trader remains a high-risk trade in a slowing market.

In short: the brakes are on. Wait for the valuation to align with reality before stepping on the gas.