Is REA Share Price Valued Too High to Buy?

Online property service provider REA Group Ltd [ASX:REA] released their much-anticipated FY19 results today.

At time of writing, the REA share price is sitting at $96.07 up 4.94%:

Source: tradingview.com

The company managed to achieve a respectable revenue increase of 8% to $874.9 million. Net profit from core operations (NPAT) went up 6% to $295.5 million.

However, these results were less than what analysts predicted.

At the start of this week, Goldman Sachs issued a note expecting an 11% increase in REA’s revenue to $894 million. They also expected an NPAT gain of 10%. The market consensus estimate was even higher.

And yet, with a market cap of $12.06 billion, REA is trading at a P/E of around 40. That’s quite high.

What’s more, earlier this week, Macquarie analysts retained their outperform rating on the company, lifting its post-result price target to $105.50.

But REA shares are still a decent way away from that target at time of writing, sitting at $96.07 apiece.

So is the company valued too high?

For answers, it is important to know what REA’s own expectations are regarding new listings.

Future of REA share price could be impacted by listings

In the investor presentation, the company emphasised the ‘unfavourable market conditions’ that would make any kind of increase in profit look commendable.

For instance, REA highlighted an 8% decrease in Aussie residential listings year on year, heavily weighted towards the second half of FY19.

But what they unfortunately had to admit was the implications these market conditions would have for FY20 results.

As noted in the investor presentation:

The FY20 full year target is for the rate of revenue growth to exceed the rate of expense growth, however, this will not be the case in every quarter due to the stronger listing comparatives in H1FY19 and the different timing of expenses over the year.’

And the outlook sounded even more troubling in the results announcement:

Listings for the first half of FY20 are likely to be lower than the same half last year, due to the comparatively favourable listings environment in H1FY19; particularly in Melbourne and Sydney.

As a result we expect revenue growth to be heavily skewed towards the second half.

With such difficulties on the horizon, it’s hard to imagine the REA share price reaching or breaking north of Macquarie’s ambitious price target.

So if REA isn’t a sure bet anymore, where to next?

It may be time to pivot your portfolio to more exciting options that merge digital with finance.

We are talking in this case, about the rise of fintechs.

REA anticipating less future growth

Much of the investor presentation was geared toward REA’s impressive results in their real estate app.

CEO Owen Wilson claims ‘people are now spending more time on our app than ever before’. App launches grew 21% year on year, with users spending nearly five-times longer than the nearest competitor.

There was also a 9% growth in logged in realestate.com.au users, with over 1.2 million properties being tracked on the online platform, and more that 18,000 verified agent reviews.

As the company says, FY19 was all about ‘enhancing customer experience’ by ‘changing the way the world experiences property’. And arguably, they achieved this.

But it comes at a cost.

Operating expenses increased in FY19 compared to account for this investment in further ‘product innovation’.

And ultimately, REA admits that ‘while we are continuing to invest in growth initiatives, planned efficiency gains and strong cost management will significantly reduce the rate of cost growth in FY20.

As such, they’re expecting FY20 full-year costs to be flat year on year.

REA are banking on a market recovery for future gains, citing lower interest rates and improved lending environment as keys for a market upswing.

However, after hitting all-time highs, the ASX is beginning to wobble — signalling that Australia’s ‘miracle economy’ could be due for a slump.

A subsequent decline in the housing market would eat into REA’s revenue, so it may be wise to consider alternative options.

Regards,

Lachlann Tierney

For Money Morning

PS: If it’s innovation that intrigues you, it’s time you became familiar with AI technology. Check out this free report on the most exciting AI stocks on the ASX. Download now.


Lachlann Tierney is a writer for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. Recently he has been working with Ryan Dinse. He is involved in three publications:


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia