REA Group Limited (ASX: REA) is the outright leader in Australia's online real estate classifieds market, as was confirmed in its most recent earnings update. Despite its dominance and strong growth however, investors are becoming increasingly concerned that the group's best days might be behind it.
On Wednesday last week, REA Group reported a 21% lift in revenue for the nine-months ended 31 March 2015, while segment EBITDA (earnings before interest, tax, depreciation and amortisation) rose 30%. Meanwhile, it also boasted that it had nearly 93% of all residential property listings in Australia (ahead of its closest competitor which had a 67% share), while its unique audience reached a record 4 million in March 2015.
These are truly astonishing numbers for a company in REA Group's position and would ordinarily impress the market, but that certainly wasn't the case last week. Instead, investors sold the stock down nearly 13% between Wednesday and Friday with the stock falling to just $41.99 from $48.08.
Are the market's concerns justifiable?
Leading into the earnings report, REA Group had been priced for perfection. The stock was trading at 42x last year's earnings per share, suggesting that investors believed the company's rampant growth could continue well into the future.
While revenues grew 21% over the nine-month period, a glance at the company's recent earnings reports showed that revenue in the third quarter was less than 13% higher, with growth being skewed towards the first six months. This could be attributed to a 7.2% decline in residential listing volumes during the quarter, as stated by REA Group, but investors could also see this as a sign of what is to come.
Furthermore, REA Group remains well ahead of its competition, but it seems that the gap may be closing which could threaten REA Group's ability to maintain its unbelievable growth rates. REA Group's primary rival domain.com.au (Domain), which is owned by Fairfax Media Limited (ASX: FXJ), reported revenue growth of 27% for the 1 January 2015 to 26 April 2015 period.
Of course, there is room in the industry for more than one single player, but a surging Domain could certainly impact REA Group's ability to continue growing at such extraordinary rates.
Should you buy REA Group?
REA Group is a great Australian company, and one that deserves to be on a serious long-term investor's watchlist. But at today's price, it's no cheap investment and investors could likely do better by looking elsewhere.
