Ask any investor which companies on the ASX have the strongest economic moats or competitive advantages and their response will usually be first the big four banks, followed by Australia's listed tech companies such as Carsales.Com Ltd (ASX: CAR), SEEK Limited (ASX: SEK) and REA Group Limited (ASX: REA).
Of these, you definitely should have bought REA Group! The company, which is behind the phenomenally successful realestate.com.au stable of websites, has delivered a 295% return over the last five years. That gain has already happened but there are two companies listed on the ASX that have the potential to be the next REA Group.
2 top small caps for your watchlist
iCar Asia Ltd (ASX: ICQ) and iProperty Group Ltd (ASX: IPP) were both listed in 2013 and were founded by current chairman Patrick Grove, who also founded ASX-listed company iBuy Group Ltd (ASX: IBY), which has since been renamed to Ensogo Ltd (ASX: E88). Since listing, iProperty group is up 1,050%, iCar is up 230% and Ensogo is down 64%, so let's ignore Ensogo for now because it's a completely different proposition.
iProperty Group owns real-estate listing websites and iCar Asia owns car listing websites operating exclusively in Asia, with the plan of replicating the success that Carsales.com and REA Group have had in the much smaller Australian market.
What's to like?
The main reason to buy iProperty and iCar is the belief that they can replicate the system used by Carsales.com.au and Realestate.com.au to dominate the significantly larger, but still heavily underdeveloped, Asian online classifieds market.
They're so underdeveloped in fact, that both companies have already achieved market-leading positions in their markets of Malaysia, Indonesia and Thailand (iCar) and Malaysia, Indonesia, Hong Kong, Singapore and Thailand (iProperty).
Buy one or both?
The major difference between the two is that iProperty is much further along its road to consistent profitability than iCar. In its most recent quarterly report iProperty announced that it generated positive cashflow of $650,000 for the quarter, up from $100,000 in the previous quarter.
iCar meanwhile announced a $15 million capital raising to fund the group's negative cashflow through to the end of 2017 when it expects to break even.
The other major difference is the size of the companies. iCar has a market capitalisation of $171 million versus $551 million for iProperty. To put this in perspective, Carsales has a market cap of $2.6 billion and REA Group $5.7 billion.
To say the opportunity for iCar and iProperty over the next 5 to 10 years is extraordinary is an understatement. Indonesia alone has over 10 times the population of Australia, Thailand has a population three times the size, and Malaysia around 1.5 times.
High growth companies will outperform as they demonstrate their successes but can also underperform in a market crash. How you deal with those situations defines you as an investor and underpins your success.
