Should You Sell Seek Limited shares today?

What Happened to the SEK Share Price?

Seek Limited [ASX:SEK] saw a massive drop in share price today. SEK was trading at $16.95 at about 1pm, after suffering a 9.5% decline from the previous trading day. The entire Australian market was lower, mainly as a result of major bank stocks pulling back. Earnings were mixed; Seek Limited was one of the losers of the day.

Why Did This Happen to SEK Shares?

Seek.com has been a rising star in the domestic market. In terms of its primary business, online job search, the company has maintained dominance for a number of years. With the increasing influence of companies such as Linkedin, Glassdoor and Indeed.com, Seek is no doubt facing increased competition. However, its dominance in job search in Australia is still unrivalled.

The company has a fat margin of 57%. With a lean business model, the company is able to reinvest cash to focus on placement strategies, which it hopes will create future growth. Seek has an impressive portfolio of overseas acquisitions, particularly in emerging markets. Seek controls a 24% stake in China’s essential job search site Zhaopin.com. This business contributed to a earning of $31.8 million, a growth rate of 29%. The company also controls a stake in Brasil online, another emerging international business with strong earnings of $22.4 million. The company also has SEEK Asia via its JobStreet acquisition. These positions in emerging markets will provide enormous growth in the coming years.

What Now for SEK?

Why did Seek shares suffer? Because the company missed its profit expectation. Underlying net profit after tax grew 9%, scoring AU$94.1 million. This, however, was lower than the consensus of AU$101 million. Seek will increase its interim dividend to 19 cents, an increase of 36% from a year ago.

The problem with Seek has been the ‘expectation factor’. Investors have been trading the company at over 30 times expected earnings in the past year. Investors bet on the company’s ability to continue to deliver outstanding results based on its acquisition strategies, reinvestment strategies and the current economic environment.

The truth is there was a high degree of ‘chaotic’ behaviour at work. Increasing optimism on the company led to more investment into the company, which became a self-fulfilling prophecy. It was inevitable that such pricing momentums would adjust.

Seek Limited remains a solid company with fantastic fundamentals. That is good enough for long term investors. However, we are undergoing a process of expectation adjustment.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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