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Should you buy Carsales.Com Ltd at today’s share price?

Fortunately for its shareholders, Carsales.com Ltd (ASX: CAR) has generated a return of more than 20% this year to date. Trading at a price-to-earnings multiple of nearly 30x earnings, is Carsales a worthy inclusion into your portfolio at its current valuation? 

Time to invest?  

Whilst it’s easy to feel like you have missed the boat following the bull-run Carsales has been on this year, I do believe that Carsales is still an attractive investment for investors with a long-term horizon.

In Carsales’ recent earnings report the company’s revenue growth outperformed expectations, up 8% from FY16 to $372.1 million (vs. consensus of $367.7 million), whilst EBITDA grew 4% to $176.5 million, in line with expectations. 

Carsales is poised to benefit from the booming online car classifieds sector, which is surging due to record levels of domestic motor vehicle sales and the structural shift towards digital classifieds.

In fact, Ibisworld estimates that the Australian online car classifieds industry revenue was $350 million in 2016 and predicts this will reach $478 million by 2021. Importantly, Carsales maintains a competitive advantage in this space due to its network effect, driven by its strong brand and superior number of listings, which makes Carsales very attractive for both car sellers and buyers.

Whilst this is not an indestructible model, it does give a defendable competitive advantage to Carsales, which is reflected in its ability to maintain its market share of ~73% despite intense competition from new entrants. 

In addition to its domestic business, Carsales also has numerous early-stage investments in high-growth markets including Brazil, South Korea, Mexico and Malaysia, which positions the company for growth.

In its recent earnings announcements, Carsales reported 87% revenue growth in these international businesses compared to FY16, albeit on a small base. The company has highlighted the potential to generate revenue of $1.12 billion within its existing international investments in the long run. This is assuming it can scale its operations to achieve the same share of gross domestic product in these markets that Carsales has attained in Australia.  

Considering these promising fundamentals, I would put Carsales up there with Webjet Limited (ASX: WEB) and REA Group Limited (ASX: REA) as excellent options for investors looking to get exposure into the online classifieds/marketplace realm. With a dividend of 21.5 cents per share reaching its ex-dividend date on the 22 September, now is a good time to invest.  

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Motley Fool contributor Greg Burke has no financial interest in any company mentioned. 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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