Shares in online recruitment marketplace SEEK Limited (ASX: SEK) dropped around 5 per cent this morning after the business announced plans to assume 100 per cent ownership of its SEEK Brazil business and lift its ownership interest in SEEK Asia.
SEEK also re-affirmed its financial year (FY) 2016 guidance for net profit to be approximately $195 million before adjusting for investments in early stage growth ventures of approximately $20 million.
However, the market-moving news is the forecast that net profit for FY17 will be in the region of $215 million to $220 million before deducting for significant items and further early stage growth venture investments.
Effectively this means FY17's profit (after deducting for significant items) could be little more than flat on the $195 million expected in FY16 before the additional investments. Marginal profit growth is not what's expected from a business that trades on around 27x analysts' forecasts for earnings per share in the region of 57 cents in FY17.
The stock is falling today as sacrificing short-term profit growth to invest for the long term is generally not a popular move with investors who value stocks according to future free cash flow projections and dividend payouts. The shortsighted approach of the market means the stock may remain under pressure in 2016.
SEEK's Australian operations are relatively mature now and developing its extensive international operations is clearly the big growth opportunity. It already operates dominant and growing jobs websites in China, Mexico, India and Brazil, with other operations across South East Asia and Africa also being invested in.
The decision to step up its investment game now is probably a reaction to the growing threat that its international operations face from online US jobs juggernaut and social network Linkedin.
The threat's grown larger with Linkedin's new owner Microsoft evidently expecting social networks to start disrupting the job-seeking sphere just as they have other public spheres. Just how much Linkedin could disrupt SEEK is up for debate, although it remains an issue that investors should pay close attention to.
Despite this competitive threat and those from other online jobs marketplaces, SEEK retains some attractive investment characteristics. Its international opportunity is eye-wateringly large, while its founder-led management team and digital tailwinds provide additional ballast to the investment case.
In my opinion at $15.20 the stock is a buy and will likely outperform the market over a three to five-year time horizon thanks to investments being made today that will pay off over the long term.
