REA Group Profits drop 18.5%. Is the Growth Story Over?

stock market drop

REA Group Ltd [ASX:REA] was down 7.75% this morning, to $63.05 per share.

What happened?

REA ended the week by releasing its FY17 full year results. Revenue from continuing operations was up 16% to $671.2 million. But thanks to impairment charges, net profit was down 18.5% to $206.3 million.

According to the group, ‘revenue growth was driven by a 14% increase in Australia and the inclusion of iProperty revenue’. CEO Tracey Fellows said:

This is an exceptional result, driven by our focus to create the best products and experiences that deliver outstanding value for our customers.

In Australia, we have extended our position as the clear market leader, with our audience growth reaching record highs against our nearest competitor.

Globally, REA is focused on Asia and its investments in the US. But as The Sydney Morning Herald highlighted:

Weakness in Asian property markets has blown [a] hole in REA Group’s full-year profit, even as the property listing business posted strong growth in its core Australian operations.

What now?

REA has been a great investment for shareholders. Since the start of 2012, the stock has appreciated more than 446%, paying dividends along the way.

It’s why REA is one of the most prized stocks on the ASX. It is a fast growing company and investors don’t want to miss out.

But sooner or later, all growth companies — including Amazon.com, Inc. [NASDAQ:AMZN], Netflix, Inc. [NASDAQ:NFLX] and REA — stop growing.

I’m not saying that REA Group is a mature business. But if you’re going to pay 32-times earnings for a stock, then you want to be confident it will grow for years to come.

If REA is no longer a market darling, these three small-caps will likely take its place.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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