Here’s what could go right (and wrong) for REA Group Limited

REA Group Limited (ASX: REA) released its third quarter trading update for the three months to 31 March 2018 last week which was pleasing to the market as the share price was up 5% on the day.

The company has been a strong performer on the ASX with its share price up 165% over the last 5 years and it has demonstrated its dominance over Domain Holdings Australia Ltd (ASX: DHG) as the leading online real estate platform in Australia.

Looking ahead to the next 5 years, here are some key areas that could either drive further growth for REA Group or cause some pain for shareholders:

Growth in Asia

REA Group’s PE ratio of over 40 is a reflection of the market’s expectation of growth in the company’s Asian subsidiaries. In Asia, the company has a larger addressable market compared to Australia which has a smaller market that REA Group already dominates.

I think REA Group will continue to grow rapidly in Asia, particularly in Malaysia where it is the market leader as well as Indonesia and Singapore where its market share is increasing.

If growth in Asia slows down, I think the REA Group share price would face a significant correction.

Challenge in America

I think Move Inc, REA Group’s investment in the United States, faces a significant challenge from Zillow Group (NASDAQ: ZG) which is the dominant player in that market. Zillow’s acquisition of Trulia (which resulted in a legal dispute with Move Inc) further strengthened their market leader position and so I’m not optimistic about REA Group’s chances of success in the US.

Property market crash

I think the impact of a recession or a crash in the Australian property could go either way for REA Group. On the one hand, it could lead to higher listings (and income for REA Group) as interest only property investors struggle to refinance their loans and thus need to sell their properties to pay off their loans. On the other hand, it could lead to lower listings as property owners wait for the market to recover.

Foolish Takeaway

I think REA Group is a good growth focused business with high margins but at current prices, these three revolutionary companies would make a better investment.

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Motley Fool contributor Kevin Gandiya owns shares of Zillow Group.

You can follow Kevin on Twitter KevinGandiya.

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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