The SEEK Limited (ASX: SEK) share price continues to trade near all-time highs following the release of upbeat quarterly results from its China-focused subsidiary Zhaopin Ltd on Tuesday.
Zhaopin's trading update follows a strong six months of trade for SEEK, whose share price has surged a formidable 17.5% since the start of the year. With SEEK's shares currently trading on a trailing price-earnings of 37.6x (based on Tuesday's close of $17.44), I thought it was time to re-consider whether Australia's leading job-classifieds company deserves your hard earned investing dollars.
Here is what I found.
Zhaopin update
On Tuesday, SEEK subsidiary Zhaopin provided a third-quarter trading update based on its unaudited financial results.
For the quarter ended 31 March 2017, Zhaopin reported revenue and earnings (EBITDA) growth of 30% and 5% respectively, demonstrating the company's continued expansion into the Chinese market.
Zhaopin's growth in quarterly earnings comes on the back of its 23% half-year revenue growth, indicating that SEEK's bid to make Zhaopin China's leading jobs portal is coming to fruition. Whilst the incremental increase to EBITDA comes at the expense of profit growth, given it is a direct result of increased marketing and sales expenditure, the pleasing silver-lining is that management's growth strategy around Zhaopin is starting to pay dividends as more users visit its website.
Growth potential
As REA Group Ltd (ASX: REA) and CarSales.Com Ltd (ASX: CAR) have shown over the years, the first-mover advantage is critical in becoming a market leader for classifieds advertisement. With SEEK's Australian and New Zealand operations continuing to perform well in the mature market, SEEK's international expansion is the key driver for future profit growth.
Whilst management's commentary around its half-year results indicate this expansion is on track, with SEEK already owning the leading job-classifieds site in Latin America, in my mind, conquering Zhaopin's target market – China – is key.
Therefore, despite the current profit contribution from Zhaopin likely to underperform its headline EBITDA and revenue growth rates (given the relatively high level of expenditure), management's clear vision to ensure Zhaopin penetrates the Chinese market and becomes a market-leader in the region is good-news for long-term shareholders.
Accordingly, I don't think the growth story for SEEK is done just yet.
Foolish takeaway
Despite Australia's knack for entrepreneurial innovation, the S&P/ASX 200 Index (ASX: XJO) has slim pickings in the way of up and coming technology stocks.
Although the likes of Aconex Ltd (ASX: ACX), WiseTech Global Ltd (ASX: WTC) and Computershare Limited (ASX: CPU) offers some choice as market-leaders in their respective fields, I believe none of them carry the same growth potential as SEEK.
Given SEEK's stranglehold over Australia's job-classifieds market, and its international division growing at the rate of knots, I believe the company has a bright future ahead of it.
This being said, at its current valuation, SEEK's share price demands perfect execution on its growth strategy meaning it poses downside risk if management fails to deliver. Accordingly, whilst the stock is definitely one to own, I recommend investors wait for a pull-back to below $16 per share before buying.
