The S&P/ ASX 200 (ASX: XJO) has retreated around 10% since the August profit reporting season with some of the biggest fallers being the popular growth shares that trade on high multiples of trailing or estimated future profits.
For example, the likes of Treasury Wine Estates Ltd (ASX: TWE), Carsales.com Ltd (ASX: CAR) and Reliance Worldwide Corporation Ltd (ASX: RWC) have all fallen heavily as investors take profits or sell in anticipation of further share price falls.
Another favoured growth business of ASX sharemarket investors, REA Group Limited (ASX: REA) has fallen close to 25% since hitting share price highs above $93 in August 2018.
Today REA shares change hands for just $71.95 as investors worry about a couple of issues.
First, is the general sell-off in growth shares as rising interest rates in the US threaten the net present values of stocks as calculated by Wall Street or other professionals.
A factor more specific to REA Group is probably Australia’s falling property prices over the past 12 months.
In Sydney and Melbourne, for example, house prices are reported to have dropped between 5%-7% over the past year.
Falling house prices are not necessarily a negative for the operator of realestate.com.au however, the tougher it is for vendors to sell the more likely they are to spend on additional products that REA Group offers.
For example, a key profit driver (aside from listing volumes) for REA Group is “depth listings” which promote a property for sale or rent over other properties in return for extra fees.
In a strong property market vendors are likely to find a buyer without additional spending on product support, but the weak market means REA Group may continue to profit from a greater sale of depth listings over the six months to December 31, 2018.
It also possesses a strong competitive position in that its only real rival is Domain Holdings Australia Ltd (ASX: DHG) that is still majority owned by Fairfax Media Limited (ASX: FXJ). Therefore REA Group looks well positioned relative to industrial shares that exist in far more competitive sectors.
It is also moving into mortgage broking services in an attempt to diversify its revenue and profit streams. Meanwhile, REA Group also has interests in leading property websites in the U.S, Malaysia, Hong Kong and India.
In FY 2018 it paid total dividends of $1.09 per share on earnings of $2.12 per share, which means it has plenty of free cash flow left over to reinvest in growth opportunities.
At the start of 2006 REA Group shares sold for just $2.70 which means it’s up 26x in around eleven-and-a-half years. Therefore the recent share price falls could be just a small blip on what remains a long-term growth trajectory thanks to the high-quality nature of the business and its staff. Management is due to report first-quarter results on November 8, 2018.
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Motley Fool contributor Yulia Mosaleva has a financial interest in REA Group shares. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and Treasury Wine Estates 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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