Is the REA Group Limited (ASX: REA) share price a buy after falling 33% because of the coronavirus share market selloff?
REA Group is the owner and operator of realestate.com.au, the most popular real estate portal in Australia. It also operates a number of other brands like realstate.com.au Home Loans, realcommercial.com.au, Spacely, Flatmates.com.au, Smartline Home Loans, Hometrack and 1form. It offers a whole range of property services.
Here are some things to consider about today's REA Group share price:
It's a great business
Before the coronavirus became a pandemic it was obvious that REA Group was one of the best businesses on the ASX.
REA Group has a very strong brand. Being the market leader means you attract the most potential buyers. Which means you'd attract the most sellers. Having the most houses for sale attracts more potential buyers. It's a very strong loop.
This market power allows the company to steadily increase its prices to little detrimental effect.
An extra business bonus with REA group is that it owns stakes in some of the leading property sites across south east Asia, India and North America. These are going to impressive profit centres in the future – just not yet.
Property sales are going to dry up
The next six months are going to see property sales dry up. It won't go to zero, but there are going to be a lot less properties advertised compared to a year ago. This is bad news for REA Group because it needs volume to generate attractive operating leverage.
How much will REA Group's earnings fall? It may well see a fall of 33% or more.
But the important thing to remember is that REA Group's share price is meant to represent its prospects for many years into the future, not just a six-month or 12-month period.
At some point, property sale volumes will return.
Ultra-low interest rate
Australia's official interest rate is now just 0.25%. This should mean several things.
It should mean that ASX shares like REA Group are worth a bit more than they would be if interest rates were higher.
The low interest rate also means that house prices would arguably be a little higher than a higher interest rate. It also means that REA Group can arguably justify charging a higher price than it otherwise could, particularly in this environment where it's really hard to sell a property. The digital advertising will be key for getting interest, particularly if you can give a digital walkthrough.
Foolish takeaway
REA Group is currently trading at 25x FY22's estimated earnings. I think it looks attractive for a long-term buy today. There may be a bit more pain over the coming months, but opportunities like this won't come along very often.
