Shares in online real estate business REA Group Limited (ASX: REA) have plunged 3.7 per cent on a day that the benchmark S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) index has climbed 0.5 per cent higher.
The heavy selling pressure is probably the result of Fairfax Media Limited (ASX: FXJ) revealing more strong growth numbers for its Domain business, which is REA Group’s arch-rival in the online property market. REA Group is majority owned by News Corp (ASX: NWS) and is also Fairfax’s biggest news media rival in Australia.
Fairfax has been investing heavily in domain.com.au and is seeing a healthy return on its investment with Domain posting earnings of $65.7 million on revenues of $153.9 million for the six-month period ending June 30 2016. The revenues and earnings are up 63% and 74% over the prior corresponding half-year period and both are accelerating far quicker than costs. Fairfax has also announced $989 million in write downs across its media assets and plans to start reporting Domain Group’s results as a separate operating entity moving forward.
There’s no doubt that REA Group has an aggressive competitor on its hands in the shape of domain.com.au and every dollar of advertising and agency fees that it wins is conceivably a dollar less for REA Group’s top line. Fairfax has also reportedly been investing in promoting domain.com.au outside the populous states of Victoria and New South Wales, with new staff hired in cities such as Brisbane.
Both Fairfax and News Corp also rely heavily on their flagship digital media assets such as The Australian and Sydney Morning Herald in Australia to direct traffic to their real estate classifieds businesses and investing in them sufficiently will be important in meeting this strategic goal. In a sense then the rocketing growth of the online property assets is now helping to fund the ailing old world media assets that continue to deliver sliding revenues and earnings, although both are still relied upon to help build a network effect and reader traffic for the classifieds businesses.
Domain’s rocketing growth means some regard Fairfax as an attractive investment proposition trading as it does on around 16x analysts’ estimates for earnings per share of a touch over 6 cents in FY16. However, question marks remain around the future of its extensive print assets, which adds substantial risk to the long-term outlook for investors.
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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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