The best £1.99 I have ever spent bought me a copy Peter Lynch's One Up On Wall Street from a London charity shop.

The premise of One Up is as enticing as it is simple: everyday people can use insights from their daily lives to help them find successful investments. There are two main areas you might stumble across such inspiration.

First, you have products that you enjoy as a consumer, or see others enjoying. Then you have products and services you come across in your line of work.

These insights do not need to be your own. Lynch famously turned his wife’s enthusiasm for L’eggs tights into a successful investment in its parent company. And today, I’m going to share an insight from a conversation with my friend at the pub.

"A tollbooth you can't get around"

Jonny moved to Australia from the UK a year ago. He works in the car business and recently graduated from selling cars himself to training people that do.

It didn't take Jonny long to realise a key ingredient to selling cars in this country. It isn't a personality trait or a winning sales tactic, although I'm sure he has a few of those. It is the ability – or should I say, the requirement – to place adverts on Carsales.com.au.

"It’s a tollbooth you can’t get around, under or over”, he says. “You just need to pay it."

If you hear a friend speaking in terms like that about a product or service, you should get excited to learn more about the business behind it. Why? Because those attributes – something you must buy, from a specific supplier (and only them), without quibbling on price… suggests that a moat might be in play.

Before we dig into Carsales.com.au’s moat a bit, let’s perform Peter Lynch’s initial two-step approach to seeing if insights like this might be investable.

1. Is the product or service sold by a publicly traded company that you can invest in?

Yes - Carsales.com.au is owned by CAR Group (ASX: CAR).

2. Does the product, service or business segment comprise a big enough portion of the company’s business to make a difference?

Again, yes. CAR Group now owns several marketplace websites across the world but Carsales.com.au remains a key revenue driver. Australia represented roughly 40% of group revenue and 50% of adjusted profits in fiscal 2024.

Digging into Carsales' moat

A moat is a structural feature that protects the returns (in the form of future profits) that a company can make on investments back into its business. Most businesses eventually see their ability to make profitable reinvestments eroded by competition. A moat can stop this from happening.

As a customer, Johnny experiences the result of Carsales' moat – the fact that he and other people working in the car sales business have contintually shunned alternatives and kept paying higher prices to advertise on carsales.com.au.

Led by Carsales.com.au, CAR Group's Australian operations generated $450m of revenue in fiscal 2024, and the company keeping a whopping 65% of that in adjusted profits. That is a high percentage of revenue to keep as profits, and one that would definitely be competed away unless something was preventing that from happening.

What allows Carsales.com.au to make those sort of profit margins? And more importantly, what protects them from competition?

The power of network effects

Carsales’ moat mostly stems from a network effect – a phenomenon where every additional user of a product adds value to every other user.

In the case of Carsales.com.au, more sellers listing vehicles makes it a more attractive place for buyers to search for vehicles. In turn, this makes it a more attractive place to list vehicles (to the highest number of motivated buyers) and so on.

Once this passes what our CAR analyst Roy Van Keulen calls a “tipping point”, the value that buyers and sellers get from the leading product makes it extremely hard and expensive for competitors to tempt buyers and sellers elsewhere.

The power of 'good enough'

Van Keulen sees another reason that CAR Group continues to get an outsized share of car listings: sellers and buyers know it does the job.

Think about it from the seller’s side. They can only sell each car once. Therefore they only need enough leads to sell a single car. Any money spent on leads beyond that is wasted.

Buyers face a similar equation, if more so in terms of effort. If carsales.com.au easily has enough options for them, why bother searching extensively on other marketplaces?

“Systems that enable dealers to broadcast listings to every marketplace simultaneously and pay on a per-lead basis should incentivise listing across every platform” says Van Keulen. “But sellers usually don’t bother. They know www.carsales.com.au provides them with all the potential buyers they need.”

Same area, very different terrain

The network effects visible in CAR’s business echo those of many other online marketplace businesses. However, Van Keulen sees an important difference between vehicle marketplaces operating in other verticals like real estate and job listings.

The dream situation for businesses like this is to become the one and only place that sellers must advertise – the winner in a winner takes all situation. A force that can work against that is the divisibility of a market into different niches.

In the case of jobs, this might take the form of specialised marketplaces by occupation or experience level (for example graduate jobs). For real estate, which Van Keulen says is inherently local, it could take the form of focusing on particular locations.

Van Keulen thinks that the vehicle market is far less divisible. For one, cars can be moved, which guards against elements of geographic segmentation. He also thinks that vehicles are less easily segmented into distinct niches because buyers can readily consider and compare cars across different categories.

For these reasons, Van Keulen thinks that online marketplaces for vehicles are far more likely to gather around a single solution. As a result, he thinks that Carsales.com.au enjoys a stronger position in its market than the likes of REA Group (ASX: REA) and Seek (ASX: SEK).

Not every insight needs an investment

Jonny’s insight switched me on to the moat that Carsales.com.au has carved out. But does that mean I should go out and buy the stock immediately? Not so fast.

First of all, you need to work out if a potential investment fits with your broader strategy. This might involve checking it against your investing criteria, which would require a deeper look at the company from several angles. You can learn more about setting your investing strategy here.

Then you have valuation. Most above-average quality businesses tend to trade at premium valuations, and that definitely appears to be the case with CAR Group at the moment. At a recent price of around $42 per share, CAR traded more than 40% above Roy Van Keulen’s estimate of Fair Value.

Don’t let this put you off, though.

Who is to say that CAR Group won’t become cheap in the future? And who is to say that the next business you discover on the grapevine won’t be a screaming bargain that meets your investing criteria? As Peter Lynch might say, keep turning over those rocks.

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