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Better buy: SEEK Limited v Carsales.Com Ltd

The internet has changed a number of industries significantly over the last few decades. The way that jobs and cars are advertised is no exception.

Seek Limited (ASX: SEK) and Carsales.Com Ltd (ASX: CAR) have both grown into large businesses, taking a lot of revenue away from the newspapers run by Fairfax Media Limited (ASX: FXJ) and News Corp (ASX: NWS).

With these two internet juggernauts controlling significant parts of the Australian classifieds market, which one is the best to buy?

Future growth

It’s hard to see much more growth in the domestic Australian market for Seek and Carsales, therefore their international expansion plans will be what drives growth.

Seek has large stakes in job portal websites in several countries including Zhaopin in China and Seek Asia which operates in several other Asian countries. In its half-year result to 31 December 2016 it revealed that Zhaopin revenue had grown by 23%.

Carsales has a large presence overseas as well with its stakes in leading websites in countries like Chile, Argentina, Colombia, Brazil and Mexico. Carsales reported a 106% growth in its international division, although this only represented sales of $3.5 million out of a total of $178.6 million sales.

If these trends were to continue then Carsales’ international division would turn into a sizeable part of the business, but at the moment Seek’s growth in China makes a bigger impact on the business..

Competition

Carsales has all of the car dealerships in Australia as competition, although a fair portion of them actually use Carsales to sell or advertise some of their cars. Investors should keep an eye on how AP Eagers Ltd (ASX: APE) and Automotive Holdings Group Ltd (ASX: AHG) fair over the coming years, a decline for them could be to Carsales’ benefit.

Seek could face increasing competition from international heavyweights Indeed.com and LinkedIn, who can use their large networks to attract potential employees and employers away from Seek.

I think Seek faces the bigger competitor presence, but that doesn’t mean that it can’t prevail. Investors should keep a track of Seek’s domestic revenue and profit growth to see if any negative effects are occurring.

Valuation

Seek is currently trading at 31x FY17’s estimated earnings with a grossed-up dividend yield of 3.33%.

Carsales is currently trading at 24x FY17’s estimated earnings with a grossed-up dividend yield of 4.66%.

Better buy?

At the current prices, I’d be more comfortable buying Seek shares because of the increasing use of digital media in its main growth market of Asia.

Jobs will always be advertised, even during recessions and Seek has a big market edge being the largest jobs portal in Australia and in other countries. However both could be good growth options over the next few years

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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