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Can REA Group Limited reach $100?

After reflecting upon the recent profit release by Rea Group Limited (ASX: REA), broker BA-Merrill Lynch believes that its share price could hit $100 in the next two years.

REA Group is a digital advertising business that operates 13 websites around the world that are focused on real estate. It provides online advertising of residential and commercial properties. It also delivers online advertising solutions through its websites to help real estate agents sell or rent properties.

By gaining first-mover advantage, REA Group has established a strong brand in Australia that affords strong protection from competition. The fact that there are only two online sites with a critical mass of eyeballs, the other being domain, illustrates the effectiveness of the protection.

In what has been a stellar reporting season for first-mover advantage companies, we have seen Carsales.com Limited (ASX: CRZ) and Seek Limited (ASX: SEK) report well above consensus forecasts. Carsales has managed to grab a dominant online market share. Again if you want to sell your car online there are few alternatives. Competing with the elephant has been tried by the very well-funded Carsguide, but it has made only a minor impression on the market share of Carsales.

The $100 share price target is founded on a number of positives. Foremost is the migration of real estate agents from a subscription-based service towards fee-per-listing. This transition should be fully completed within five years.

Also, the recent positive sentiment in the Australian property market is generating demand for REA Group’s premium listing products. News Corp (ASX: NCP) owns 61% of the Australian website which is called realestate.com.au.

Finally, accelerating margin expansion in Australia and Italy suggests that the share price may surprise to the upside. After the profit release, a shorter-term target price was adjusted by BA-Merrill Lynch from $55 to $62. The shares closed Friday at $49.32.

However, the majority of other brokers are taking a cautious stance. REA Group’s revenues are dependent on the number of paying real estate agents, product depth and yield. Changes to any of these drivers could affect future earnings. In addition, potential dis-intermediation of real estate agents may attract competitive threats.

Foolish takeaway

In my opinion, REA Group’s competitive advantage will almost certainly result in solid and sustainable earnings growth. However, the broking community is far from unanimous on the future share price and individual company mistakes can be made. So it pays for investors to monitor the competitive landscape for potential disruptors.

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

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