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Morningstar raises Carsales recommendation

Carsales.com (ASX: CRZ) had its rating raised to “hold” yesterday by investment research house Morningstar. The upgrade is based around the website’s growing dominance. This provides a competitive ‘narrow moat’, as vehicle traders naturally gravitate to the website with the largest network of tradable vehicles.

A snowball effect, or feedback loop, drives popularity and profitability. Moreover, the moat can widen as competition struggles to attract a competitive network of buyers, sellers and paying advertisers.

Morningstar said websites with the largest audiences gain a disproportionately large share of advertising revenues and expects the business to continue benefitting from the digital migration and new consumer technologies.

The group is already expanding in the massive Asian and Brazilian markets and a high price to earnings ratio around 28 reflects positive investor sentiment. It’s currently trading close to Morningstar’s upgraded fair value recommendation of $10.

Other Aussie internet sensations include online jobs advertiser Seek (ASX: SEK), travel retailer Webjet (ASX: WEB) and property website operator REA Group (ASX: REA). All have seen success based on similar fundamentals.

Foolish takeaway

At today’s price just short of $10 the group appears fully valued for now. However, the long-term fundamentals remain strong and this growth story may have a long way to go yet.

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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.

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