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 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

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.

The top ASX pick you've never heard of...

Top Motley Fool analysts just identified their #1 ASX pick for 2014, a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!). Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool's Top Stock for 2014."

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.