HomeWhy the REA Group Limited (ASX: REA) share price is…
Australian Investment Blog
ASX:CAR 08/11/2018
Why the REA Group Limited (ASX: REA) share price is surging today
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REA Group Limited (ASX: REA) $79.94 as at 8/11/2018Event
The REA Group Limited (ASX: REA) share price rallied over 10% to $79.94 in midday trade after our largest property advertising group posted a solid quarterly trading update.
This makes shares in REA Group the third best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index at the time of writing.
However, the result is unlikely to settle the ongoing debate on whether REA Group’s share price is cheap. This is despite management unveiling a 23% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $130.9 million and a 17% improvement in revenue to $221.9 million for the three months to end September.
Management credited its Australian residential business and the acquisitions of Hometrack and Smartline for the strong growth, although it did allude to potential storm clouds on the horizon.
REA Group has so far been able to defy the gloomy downturn in the Australian housing market that is led by falls in Sydney with the latest CoreLogic data showing a 7.4% annual plunge in home prices in that city – the worst since 1990.
REA Group (REA) Chart
This is because property developers have been upping their advertising spend on the REA website and upgrading to “premium” ads in order to combat the slowdown.
This trend has extended into 1QFY19 with REA Group reporting that its Developer and Commercial businesses have recorded double-digit revenue growth even as the volume of new apartment construction projects continued to fall.
However, management warned that market conditions aren’t expected to improve anytime soon, and listings may drop ahead of the New South Wales state election in March while it’s anyone’s guess what will happen during the federal election that is likely to held in May.
Furthermore, property experts have already noted that the current residential market downturn is longer than other corrections and that the increase marketing spend by property developers may run out of puff before any recovery.
While many investors will admire REA Group unassailable position in the industry, high price-earnings (P/E) growth stocks are starting to lose some of their lustre. Rising bond yields and an aging bull market tend to favour value stocks over growth, and REA Group certainly fits into the latter category as it’s on a FY19 consensus P/E of around 30 times.
Other leading online stocks like SEEK Limited (ASX: SEK) and Carsales.Com Ltd (ASX: CAR) are also facing similar concerns, although REA Group’s share price is outperforming these stocks with a more modest 4.5% drop since the start of the year.
In contrast, SEEK’s share price is down nearly 6% and Carsales.Com’s share price is 18% in the red, while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has shed 3% in value.
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