Growth stocks across the ASX have seen share price declines including REA Group Limited (ASX: REA) because of an impending interest rate rise in the USA.
But there's also a specific reason REA Group's share price has declined from $65.27 in July to today's price of $49.90.
First Domain, owned by Fairfax Media Limited (ASX: FXJ), reported that listings were down. Then REA Group released its first quarter result which saw an 8% reduction in listings. However, this is likely just a short (to medium) term issue for REA Group, making today a good time to buy.
Here are three reasons why I think REA Group should be in your portfolio:
Market leader
Realestate.com.au is by far the dominant property website in Australia, which earns the bulk of REA Group's earnings. According to Nielsen Online Market Intelligence and Fashion Suite, Realestate.com.au receives 2.3 times the average monthly visits of its nearest competitor and visitors spend 7.5 times longer on the website.
Having the most visitors also means it attracts the most sellers to the website too, which creates a positive loop for REA Group. This market power allowed REA Group to increase prices by 10% on premium ads from July 2016.
If a property downturn does occur, sellers will have to work harder at selling their property. If the properties need to be listed for longer, then that also means more revenue for REA Group.
Global property website business
REA Group is now much more than just its main Australian property website, it also owns realcommercial.com.au and flatmates.com.au, which are for commercial property and sharing accommodation respectively.
The recent purchase of iProperty Group means it has a presence in Malaysia, Hong Kong, Macau, Singapore, Thailand and Indonesia. REA Group says the online market for these countries is growing at 40% to 50% per annum – this is a great growth runway.
REA Group also recently moved into the USA with its 20% stake in Move Inc., which is the third most popular property site in America. The revenue in this entity grew by 27% during the last financial year and could keep growing strongly with the strength of News Corp (ASX: NWS) backing it.
Strong results
REA Group has managed to grow at an impressive rate since it listed. During FY16 it grew revenue by 20%, net profit after tax by 16% and the dividend by 16%.
Even with listings down by 8% during the first quarter of FY17, REA Group still managed to grow earnings before interest, tax, depreciation and amortisation by 9%. This ability to grow profits in a tough environment is exactly the type of business that Foolish investors should want to own.
REA Group is trading at 31x FY16's earnings with a grossed up dividend yield of 2.27%.
Time to buy?
I think any price under $50 is a good price to acquire some REA Group shares. The short-term pain of the share price drop will be forgotten in a few years as the underlying business keeps growing and hopefully the share price grows too. Although I don't own any shares yet, by early 2017, I likely will.
