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Why brand power is so important for the REA Group Limited (ASX:REA) share price

The REA Group Limited (ASX: REA) share price went up 8% yesterday after reporting its numbers for the first quarter of FY19.

All of the figures were pleasing, revenue went up by 17%, expenses only went up by 10%, earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 23% and free cash flow increased by 52%.

Firstly, those numbers show the economic power of an online portal. Revenue can grow faster than expenses, leading to growing profit margins.

For me, the most interesting part of the update was that REA Group said the revenue growth was delivered with a 3% decrease in listings nationally, including an 8% decrease in Sydney.

Some of the revenue growth came from the inclusion of Hometrack Australia, however REA Group also said that the revenue growth reflected “the price changes which took effect from 1 July, an improved product mix and further depth penetration. There was also a stronger contribution from newer products such as Audience Maximiser and Front Page.”

A key appeal of realestate.com.au is that it is the market leader, with 2.7 times more visits than its nearest competitor over the quarter. That means that buyers and sellers are going to make sure they go to REA Group first, which then maintains it as the leader continually attracting the most sellers and buyers.

If you can regularly implement price increases with no detrimental effect then that’s powerful brand power and pricing power. In-fact, it seems like this market downturn is actually making vendors pay for the higher-priced products. Vendors are more likely to pay for the best products of REA Group than of second-placed Domain Holdings Australia Ltd (ASX: DHG), which reported its digital revenue only grew by 6% in its trading update.

Foolish takeaway

REA Group is one of the highest-quality growth shares on the ASX in my opinion. I would have liked to buy shares in the low $70s (or lower), but after yesterday’s rise it’s valued at 31x FY19’s estimated earnings – not as attractive as a few days ago.

I’m looking to buy its shares with a forward price/earnings ratio somewhere in the 20s, so it’s staying near the top of my watchlist for now.

Instead, I’ve got my eyes on one of these top growth shares which is twice as cheap as REA Group and is heavily exposed to the ageing population tailwind.

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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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