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Is REA Group Limited a good growth stock?

There are few shares on the ASX that have done better than REA Group Limited (ASX: REA) over the past 15 years. The REA Group share price has gone from $0.23 in April 2003 to today’s $77.02.

What does REA Group do?

REA Group is best known for owning the realestate.com.au website. If you’ve looked for a house to buy or rent then you’ll likely have used this market-leading site.

It also owns other popular sites like commercial property site realcommercial.com.au or flatmates.com.au.

Why has it done so well?

When REA Group first listed on the ASX it was a pretty new concept, all the property advertising had been done through newspaper listings. Australia became increasingly digital, more people used the internet and realestate.com.au became the clear leader.

There is nothing inherently special about realestate.com.au. It is a great website, it has a good reach on the internet – yet there are many competitors who also list property.

The key thing about why it’s done so well is because of a self-fulfilling circle. It has always been the biggest property site. Being the biggest means it has the most property listings, which attracts the most potential buyers to the site, which in turn attracts the most sellers.

The cost of an ad is so little compared to the property marketing budget, REA Group can implement strong price increases which mostly falls to the bottom line.

How will REA Group keep growing?

REA Group has done well in recent years because it has encouraged property vendors to pay more for premium ads, which gives the property more exposure and gives REA Group a lot more money for the same property. Property owners may have to work even harder with advertising to sell in a property downturn.

The company has also been making investments into overseas property sites which could drive future profits. It has investments in North America, India and South East Asia.

It has also started offering loan services through its site, which could turn into a nice portion of earnings in time.

Risks?

As I mentioned earlier, there are lot of theoretical competitors to REA Group. If any of them manage to take market share away from REA Group then it could lose a lot of its advantages.

A property downturn could make investors turn negative about REA Group, but that could present an opportunity for investors who want to buy shares.

Foolish takeaway

REA Group has a good balance sheet and it’s currently trading at 30x FY19’s estimated earnings. REA Group is quite expensive for how much it’s growing each year, but the long-term compounding of earnings should make REA Group one of the best blue chips to own over the next five years.

Want more growth ideas? You should definitely read about these top shares.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. 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 Scott Phillips.

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