Autotrader's IPO Has a Few Dents

NEW YORK ( TheStreet -- Autotrader, the online home of the industry standard Kelley Blue Book vehicle value estimate database, is latest Internet company seeking to go public and the offering looks solid but still has a few dents.

On the positive side of ledger, the company operates the largest digital automotive marketplace with over 28 million average monthly unique views. It's also one of the rare Internet companies going public these days whose revenue and net income has been going up leading into its public debut.

That's right. Net Income. Not losses.

According to its S-1 filing, Autotrader's earnings rose to $68 million in 2011 from just $9 million in 2009. Revenue has swelled over the same period to $1.03 billion last year from $629.5 million in 2009. In the first six months of 2012, the company has booked earnings of $41 million on revenue of $563 million. Much of Autotrader's revenue is recurring from subscription services sold to dealers, so that's a big plus for investors to consider.

The big problem for Autotrader is its debt. Namely, $1.3 billion worth. Its annual interest payment alone is $34 million, roughly half its net income in 2011. Why so much debt? Ahh, it seems a hefty bonus has already been paid to existing shareholders. In April 2012, the company took out a $400 million line of credit then drew down the whole amount and paid a special dividend. Now they are looking for new shareholders to help pay that money back.

Autotrader's plan for growth is to get existing dealers to spend more and to sell them on its software applications. The company's mobile offering is in its early stages and they currently provide it for free, but that is also a potential source for revenue in the future. Like most Web companies, Autotrader isn't sure exactly how to earn money off of mobile, but know the company knows it needs a presence.

Investors should realize Autotrader is facing heavy competition from Cars.com and Edmunds.com as well as search engines like Yahoo! ( YHOO) and Google ( GOOG).

Autotrader seems to recognize that having a site that sells car isn't unique or sticky. So, they are heavily invested in their software solutions for car dealers, an arena where competition isn't quite as stiff.

Auto makers and dealers realize that car shopping is increasingly moving online and the advertising dollars are following the shoppers. Borrell Associates predicts that online media buys for the auto industry will rise 39% in 2012. Auto ad dollars will be shifting away from direct mail, magazines and radio. CarMax ( KMX) has learned this and has a strong web presence. Franchised auto dealers have also increased their online presence.

Cars.com is taking market share and now web behemoth Google is getting into the lead generation business. If Google thinks you are looking for a car, like a Toyota, then it will give you a car and dealer to look at. For now it is only being tested in certain markets in California. CarWoo! is rumored to be hooking up with Yahoo! Autos. Maybe because they both like exclamation marks? These deals demonstrate the battle for online auto shoppers is heating up.

Autotrader wants to raise $300 million and this is its second attempt to go public. The timetable for the listing is still unclear and the company filed once before in 2000, only to withdraw. The company plans to list on Nasdaq under the symbol "ATG."

The fact that the company is already profitable and has a stable revenue base is a big plus, but investors need to consider the tight competition and hefty debt load before ponying up for Autotrader.

-- Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.
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