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

The REA Group Limited (ASX:REA) share price and profit is benefiting from brand power.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »