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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Few things are more cherished by investors than a network effect. A marketplace, for instance, can use its range of sellers to attract more buyers, which encourages additional sellers in turn. This can produce a fast-growing, highly profitable business that is hard to dislodge.
While many companies tout their ability to produce these outcomes, few succeed in actually doing so. In the UK, two businesses spring to mind: property portal Rightmove and car sales business Auto Trader. Their market dominance and low customer acquisition costs translate into operating margins of more than 60 per cent.
Yet even network effects are not perpetual growth machines; saturation points are eventually reached. Rightmove and Auto Trader each have stated market shares of over 75 per cent. That means little scope for further gains, while any hypothetical overseas expansion would be hindered by similarly dominant rivals in other countries.
This leaves them reliant on eking out more growth from what they have, a job made doubly difficult by shaky underlying markets. Rightmove shares fell on Friday on news that investment in artificial intelligence would eat into near-term profit growth. Auto Trader has also struggled in 2025.
Some are still optimistic. Nick Train of Lindsell Train, a fund manager whose own returns have underwhelmed in recent years, recently bought into Auto Trader. Train saw the shares’ dip as a chance to right a wrong, saying he “should have been invested in this company years ago”.
Part of the business’s latest growth plan is to convert more leads into sales, and tie retailers more closely to its platform, via its “deal builder” tool. A summer announcement of a change in how the product will be offered to users unnerved some shareholders. Yet this week’s figures suggest take-up rates are starting to accelerate. The company will hope a new network effect is taking hold.
BUY: Auto Trader (AUTO)
Even though production has recovered somewhat, the UK used car market is still short on stock, writes Valeria Martinez. That’s good for sellers, but less so for Auto Trader, whose business model depends on how many cars are listed on its platform.
Half-year numbers look robust at first glance. Retailer revenue, the company’s core business line, rose 6 per cent to £253mn.
But most of that growth came from price hikes and more dealers signing up to new products, rather than from bigger stock volumes or premium listings. With cars selling faster, dealers don’t feel as much pressure to pay for more extra visibility online, which has kept growth below its historic average.
Auto Trader is introducing incentives to move customers up the package tiers and investing in new tools. But upselling is becoming more difficult in a market short on stock. Auto Trader is handling it well, but we’ll be looking for premium package and average revenue per retailer growth to accelerate. The shares trade at 22.4 times forward earnings, about a fifth below their five-year average.
BUY: Focusrite (TUNE)
The business sells audio equipment for both content creators and live events, writes Arthur Sants. The pandemic boosted content creator demand but it closed down live events. US tariffs, however, have had a solely negative impact, with 12 per cent of Focusrite’s goods manufactured in China and exported to the US.
There are signs, though, that the business is past the worst of these shocks. In the 12 months to August, its revenue increased by 8.8 per cent.
The share price has fallen dramatically since mid 2021, so it now trades at 12 times earnings, with an accompanying free cash flow yield of 15 per cent. Broker Investec believes Focusrite remains “grossly undervalued” given the quality of the business.
Focusrite is a sector leader, and it’s hard to see how demand won’t eventually rebound. The company’s strong balance sheet provides a degree of insulation against market shocks and allows it to manage its supply chain in the face of tariffs. Investec encourages investors to take a “through cycle” approach. In other words, ignore the noise.
HOLD: Associated British Foods (ABF)
Associated British Foods set tongues wagging on results day as it announced a strategic review into the structure of its fashion and food businesses, writes Erin Withey.
While no decision has been made, a Primark spin-off could help address what chief executive George Weston described to analysts as a perceived lack of investor interest in ABF’s food business.
Richard Chamberlain, an analyst at RBC Capital Markets, said that should ABF move towards a solely food-focused model, it could “lead to a narrowing of the company’s implied conglomerate discount”.
Primark increased revenues by 1 per cent year on year despite muted consumer sentiment, with like-for-like sales declines in the UK and Europe offset by growth in the US, where sales were up by 20 per cent.
With the shares trading on a forward price/earnings ratio of 11.9 times, we agree with RBC that ABF’s discount is likely to persist should the current dual structure remain. Until there is greater clarity around organisational design, we remain on the sidelines.
