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Could the REA Group Limited share price could soar further in 2018?

The REA Group Limited (ASX: REA) share price rose 2% to $76.54  this morning, after the company released its first quarter update to the market.

REA shares are up 56% in the past 12 months, and 316% in the last five years, as the company has benefited from a veritable boom in the Australian housing market.

In the first quarter of 2018, REA reported revenues (after broker commissions) were up 21% to $190 million, while operating expenses grew 17% to $81 million, and earnings before interest, tax, depreciation, and amortisation (EBITDA) grew 24% to $107 million.

REA expects that over the whole year, it will report revenue growing faster than expenses, although this may not be the case in every quarter. The company reported $34 million in free cash flow.

Listings overall were flat, although Sydney and Melbourne listings rose. We noted last month that Sydney housing prices were starting to crack, and had fallen almost 7% over the quarter.

It will be interesting to see if this has a follow-on effect on house prices or listing volumes in the coming quarter. REA Group is not directly affected by house prices as it is paid on listing, but listing volumes and price rises are the primary way that the business makes money.

In a downturn, REA’s revenue growth will slow, and it may not be able to pass on higher prices to customers as easily. Having said that, REA fees appear relatively modest as a % of average house prices, and it probably has the market power to implement higher fees or take fees away from agents.

REA is also reporting progress in its nascent financial services business, on track to deliver between $26 million and $30 million in revenue and $7 million and $11 million in EBITDA in its first year.

With REA having annual EBITDA of ~$400 million or so, financial services are unlikely to be a meaningful contributor in the near term. Over a longer period however, just like REA’s international businesses, they could become more important parts of the business. REA shares look loftily priced today, and despite the ongoing growth in the business, I’m not a buyer.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks 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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