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Trade Me Group Ltd jumps on profit result: Should you buy?

New Zealand’s most popular online marketplace Trade Me Group Ltd (ASX: TME) (NZE: TME) yesterday announced a net profit of NZ$42 million on NZ$94.4 million of revenues. The net profit was up 2.1%, while revenues were up 12.8% on the prior year.

Trade Me is an eBay-style online marketplace that lets entrepreneurial Kiwis trade everything from second-hand running shoes to million-dollar homes. It also offers classified employment, housing, dating and travel services among many other features and lifestyle services. The website’s spectacular dominance in New Zealand is emphasised by the fact that total session visits rose to 77.4 million in July 2014, compared to 59.7 million in July 2013.

Trade Me’s product and service offering contains elements of what REA Group Limited (ASX: REA), SEEK Limited (ASX: SEK) and Carsales.Com Limited (ASX: CRZ) offer to Australians across the Tasman. Trade Me also benefits from the same network effects as its Australian counterparts, because people and businesses want to advertise on the site which has the most buyers and sellers in order to get the best price for themselves. This is what restricts the competition and provides the economic moat.

Notably though the past year has been a struggle for Trade Me as a dispute with New Zealand estate agents over fees turned sour and revenue growth failed to meet high expectations.

However, the company invested heavily in FY 2014 to deliver more sustainable growth via more staff hires, promotional expenses and technology improvements. Improving its mobile platform has been a big focus, as more people spend time online while out and about. This increased capital expenditure is expected to continue into 2015 as Trade Me positions itself for long-term success.

In FY 2015 revenue growth is forecast to grow in the low-double digits percentage wise, while earnings growth is expected to be subdued as a result of the capital expenditures focused on the long term. Trade Me also appears a long-term beneficiary of the growth in e-commerce and migration of advertising revenues online. The balance sheet is strong with plenty of opportunity to invest for further growth and support generous dividend payments.

The company will pay a total dividend equivalent to NZ 16 cents per share in FY 2014 with a record date of 12 September.

Shares were up 2.83% to $3.29 in trade yesterday.

Trade Me looks a good prospect for investors who like businesses that are developing competitive advantages in growth industries. I don’t expect it to last too long at current prices, although it’s not only the good opportunity available right now. There’s another lesser known growth prospect that looks to be laying the foundations for a brilliant future. Best of all I’d say it’s definitely on a better valuation than Trade Me.

If you’re interested in reading all about it before the market cottons on to its potential just enter your email to be sent the free report straightway. It’s that simple and the report is completely FREE.

Motley Fool contributor Tom Richardson owns shares in Trade Me. You can provide feedback on Twitter @tommyr345

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