The REA Group Limited (ASX: REA) share price has risen by 12.6% over the past month and it has now reached $91. Not only that, over the past year it's up 41.7% and over the last five years it's up 212%.
REA Group is the owner of Australia's most popular property site, realestate.com.au. It also owns several other top Australian sites like realcommercial.com.au and flatmates.com.au.
Considering the REA Group share price has done so well, it's worth considering if it's a good idea buying at this stage. After all, a share price can go down and be expensive, or it can go up and be cheap.
REA Group continues to report solid growth – in the nine months ended 31 March 2018 REA Group revealed revenue growth of 20%, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 21% and free cash flow growth of 9%.
However, the main reason why the share price has done so well is that investors are willing to pay a higher multiple of REA Group's earnings, it's now trading at around 43x FY18's estimated earnings.
There are several reasons why investors should rightly value REA Group shares on a higher p/e ratio than previous years:
- It has built its market-leading position even more
- It's doing a good job of extracting more revenue from each property advertisement with more options
- It has recently entered the home loan space with loan broking
- It has just acquired property data service Hometrack Australia for $130 million for another avenue of growth
- It has a number of stakes in other property website businesses in the US and Asia
However, I think investors should be careful about investing today into REA Group shares if they want to beat the market over the next year or two.
Foolish takeaway
On the positive side, a housing downturn could mean vendors have to shell out (even more) to make their property stand out. However, I could also understand if the market becomes pessimistic about REA Group because of how property-related it is. Rising interest rates could also hurt the p/e ratio over the next two years.
I'd really like to add REA Group to my portfolio, I think it's one of the best shares on the ASX. However, I don't think any share is a buy at any price. For now, I'd avoid buying REA Group shares until they drop to at least the $70s, or the earnings catch up first. Over the next five to ten years I do expect REA Group will continue to beat the market.
