Why I'm avoiding these growth shares right now

The Motley Fool
Ferrari red car
Ferrari red car

Auto Trader(LSE: AUTO) is the UK and Ireland's largest digital automotive marketplace, and currently sits at the heart of the nation's vehicle buying process. Earlier this month the FTSE 250-listed group announced a strong set of interim results for the first half of its financial year through to 25 September. The firm revealed an 11% rise in revenues to £153.9m, compared to £138.2m reported for the same period a year earlier, with underlying operating profit rising by an impressive 23% to £102.3m.


Market domination

Over the years, Auto Trader has become the go-to place for buying or selling a used car in the UK. In fact, I remember back in the old days, before the internet, buying a copy of the weekly magazine and flicking through its pages looking for affordable bargains. Sadly, after 36 years, the final edition of the printed magazine was published in June 2013, with the company deciding to focus on its online business.

But for both the old days of print to today's online focus, in my view, the company's biggest asset has always been its strong recognisable brand. Auto Trader today attracts around 60m cross platform visits each month. Yes, that sounds impressive, but for me what's most encouraging is that 70% of these visits are now coming through mobile devices. That's the way consumers are going and the company is giving them what they want. And the marketplace has the largest pool of vehicle sellers, listing over 430,000 cars each day, with 80% of automotive retailers in the UK advertising on the website.

Is there a downside? Well, it's no secret that Auto Trader dominates the car buying and selling market in the UK and Ireland, and although the City is forecasting good earnings growth over the medium term, I just can't see it growing at breakneck speeds forever. For that reason I see Auto Trader's forward P/E rating of 26 a little demanding. I would suggest keen investors wait for further weakness in the share price before buying to gain a more favourable valuation.

Aveva swings to profit

Another mid-cap growth firm that I'm currently having mixed feelings about is engineering software provider Aveva Group(LSE: AVV). In its latest market update, the Cambridge-based business announced a swing to profit for the first half of its financial year, with revenues also rising despite continued tough trading conditions.

For the six months to the end of September the group reported pre-tax profits of £5.5m, compared to an £800k loss for the same period in 2015. Total sales climbed 3% higher to £84.3m, from £82m a year earlier, but this was assisted by favourable currency translation. On a constant currency basis, revenues actually came in 6% lower, and for me that's a more telling measure of performance.

After two years of decline, analysts reckon Aveva will return to growth this year via an anticipated 14% rise in earnings, with a further 10% improvement forecast for FY2018. But I think that with the firm's P/E rating of 24, this projected growth is already baked into the price, and at current levels I just don't see any compelling reason to buy.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.