Is it time to trade in Trade Me?

New Zealand’s answer to eBay, Trade Me (ASX: TME), has released its full year results, marking its second annual report since listing via an Initial Public Offering  in December 2011.

The company has delivered a solid set of results however the outlook by management has obviously caused investors to query the lofty valuation the dotcom trades on. In response, investors sold the stock off and by mid-afternoon the shares were 30 cents lower at $3.88 — down 7% for the day.

The results

  • Revenue was up 15% to NZ$164.1 million
  • Earnings before interest, tax, depreciation & amortisation (EBITDA) were up 12% to NZ$78.6 million
  • Net profit after tax (NPAT) was up 4% to NZ$78.6 million
  • A final dividend of NZ 8.2 cents was declared, bringing the full year dividend to NZ 15.8 cents per share

The highlight of the result was the continued strong performance from the classifieds business. Revenue in this division grew 29% to NZ$69.7 million. The disappointment was the marketplace division, which only managed to increase revenue by 4.9% to NZ$65.5 million.

The company also announced the acquisition of NZ life insurance and health insurance comparison business LifeDirect. While synergies will no doubt be possible from this acquisition, the business model of a comparison site such as LifeDirect or newly listed iSelect (ASX: ISU) is not nearly as appealing as Trade Me’s classifieds business model.

Outlook and valuation

Management’s comment that they expected revenue and EBITDA to grow at a lower rate in financial year (FY) 2014 than in FY 2013 has obviously spooked investors. However for investors with a longer term horizon, the other comment by management that Trade Me has “great long-term prospects” is of much more significance.

With the stock trading on a price-to-earnings ratio of 22 (earnings per share of A$0.174) the market rightly expects a high rate of earnings growth. Given management’s comments on the near term outlook, it wouldn’t be surprising to see the stock trade even lower from here.

Foolish takeaway

There are a select few companies that have cornered the classifieds market in their respective fields. (ASX: CRZ) in vehicle listings, SEEK (ASX: SEK) in job advertisements, REA Group (ASX: REA) in property listings and Trade Me in second-hand goods. At the right price, these would all make high quality additions to an investor’s portfolio, so any further weakness in Trade Me’s share price could offer investors a buying opportunity.

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

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