Why Goldman Sachs put a $70 share price target on REA Group Limited

Credit: chrisjtse

Shares in online real estate business REA Group Limited (ASX: REA) have climbed around 12 per cent over the last month to hit a record high of $63.06 and could have further to climb according to research analysts at Goldman Sachs.

In July the US investment bank initiated coverage of the digital giant with a favourable view and 12-month price target of $70 per share. As a result REA Group is now on Goldmans’ famous Conviction Buy list.

Goldmans noting that: “REA owns a strong set of digital real estate advertising assets, including the dominant online platform in Australia where real estate is the largest and fastest growing online classifieds vertical. When combined with emerging investments in the US (#2) and across SE Asia (#1) and a strong balance sheet that could provide further growth optionality, we see a strong roadmap for growth.”

REA Group’s meteoric share price rise is a consequence of the network effect it has built around its flagship website in Australia. Although domestically it now faces strong completion from Fairfax Media Limited’s (ASX: FXJ) website it seems the property classifieds market in Australia is large enough to support two dominant operators.

As Goldmans notes REA Group also has plenty of overseas assets including part ownership of the and websites in the lucrative US markets. In Europe it also has websites in France, Italy, Luxembourg and Germany.

However, the international assets that probably offer the best long-term growth potential are those in SE Asia that it recently bought off the iProperty Group.

REA Group now retains ownership of the number one websites in Thailand, Hong Kong, Malaysia and Indonesia, all of which are fast-growing economies with typically strong real estate markets.

Goldmans estimates REA Group will deliver earnings per share of $1.67 in FY16 and $2.11 in FY17, which would place it on 37x FY16’s estimated earnings and 29x estimated FY17’s earnings when selling for $62.26.

Evidently the stock is priced to perfection in part as it is also able to leverage the powerful media networks of majority owner News Corp (ASX: NWS) to promote its websites and create a moat that helps the network effect and subsequently strong earnings growth.

In my opinion REA Group is a great way to ride the digital future and remains one of the best growth stocks on the ASX. Investors would do well to snap up shares on any price weakness.

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Motley Fool contributor Tom Richardson owns shares of REA Group Limited. You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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