Carsales.com (ASX: CRZ) had its rating raised to "hold" yesterday by investment research house Morningstar. The upgrade is based around the website's growing dominance. This provides a competitive 'narrow moat', as vehicle traders naturally gravitate to the website with the largest network of tradable vehicles.
A snowball effect, or feedback loop, drives popularity and profitability. Moreover, the moat can widen as competition struggles to attract a competitive network of buyers, sellers and paying advertisers.
Morningstar said websites with the largest audiences gain a disproportionately large share of advertising revenues and expects the business to continue benefitting from the digital migration and new consumer technologies.
The group is already expanding in the massive Asian and Brazilian markets and a high price to earnings ratio around 28 reflects positive investor sentiment. It's currently trading close to Morningstar's upgraded fair value recommendation of $10.
Other Aussie internet sensations include online jobs advertiser Seek (ASX: SEK), travel retailer Webjet (ASX: WEB) and property website operator REA Group (ASX: REA). All have seen success based on similar fundamentals.
Foolish takeaway
At today's price just short of $10 the group appears fully valued for now. However, the long-term fundamentals remain strong and this growth story may have a long way to go yet.
Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
More reading
- Would you buy Carsales.com?
- The rise and rise of Australian companies
- Is it time to trade in Trade me?
Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.
