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Why you should buy New Zealand’s answer to eBay today

Trade Me Group Ltd (ASX:TME) is one of New Zealand’s most popular websites offering auction and classified services. It is considered the “eBay of New Zealand” and is New Zealand’s premier auction website. The company listed on the Australian and New Zealand stock exchanges in December 2011.  Since listing, the company’s share price has increased by an impressive 63%.

The company has a strong competitive advantage and has limited competition within the New Zealand market. The company’s online marketplace has in excess of three million members, which equates to approximately 70% of New Zealand’s population. More than one million members visit the website each month. The extensive network of buyers and sellers enables Trade Me Group to benefit from a growing network effect.

The relatively low penetration of ecommerce retailers within New Zealand provides substantial growth opportunities for the company. The percentage of retail revenue generated online in New Zealand is significantly lower than other developed nations. For example, in the United States, approximately 9% of the population buy and sell products online. This is compared to only 5% in New Zealand. The roll-out of the fibre network by the New Zealand Government should increase internet penetration and speed within New Zealand.

Trade Me Group is set to benefit from major ecommerce trends such as growth in mobile usage, the migration of advertising revenue online and the continued growth in online retail.

In respect of the half-year ended 31 December 2013, revenue was up 6.6%, with net profit up 1.7%. Profit was flat as a result of an increased investment spend during the period. The company has signalled that it has embarked on a period of reinvestment which will impact short-term earnings growth but will ensure the long-term success of the company. The company expects strong profit growth during FY15. Trade Me Group generates high margins and has low capital requirements which provide the company with strong cash flows.

The key risk to the company is increased competition from international ecommerce giants, Amazon and eBay, as well as ASX-listed, SEEK Limited (ASX: SEK).

Foolish takeaway

I believe the market is currently taking a short-term view on the company’s earnings growth. Considering the dominant position of the company in the New Zealand market and the future growth potential of the business, the current price presents an attractive buying opportunity.

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Motley Fool contributor Bradley Murphy owns shares in Seek Limited mentioned in this article.

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