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Why I think the REA Group Limited (ASX:REA) share price can continue to climb

Pure play online real estate company REA Group Limited’s (ASX: REA) share price was one of the best performing blue chips on the market last week, surging 9% higher to be valued at $80.50 by the close of trading on Friday afternoon. This was a pleasing result for shareholders as it snapped a significant losing streak for REA that had seen its share price tumble to a new 52 week low of $69.32 on 25 October. Since then, the share price has recovered close to 16%.

It’s been an interesting year for REA Group shareholders. The company has been one of the most consistent performers on the ASX for many years now and has quite justifiably gained a reputation as a market darling. In fact, REA’s return profile over the past 5 years has in many ways been quite similar to that of growth biotech firms like Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), or high-performing investment management company Challenger Ltd (ASX: CGF). But 2018 has been a strange year in which all of these companies have seen a significant correction in their share prices, and REA has been no different.

After climbing to a record high of $94.12 in late August, REA suffered one of its worst ever corrections, shedding over 26% of its value in the two months before this recent recovery.

So what sparked the initial selloff, and how has REA managed to get investors back onside?

The initial bloodletting could have been triggered by a number of factors. Firstly, there has been growing concern that the Australian housing market is beginning to contract. According to property data group CoreLogic, average national property prices are down 3.5% over the last year, with the biggest falls coming in Australia’s two largest cities, Sydney and Melbourne. In Sydney, property prices have declined 7.4% over the last 12 months, the biggest annual decline in 28 years, while in Melbourne prices are down 4.7%.

REA Group operates the leading property advertising websites realestate.com.au and realcommercial.com.au, and so it relies on a healthy market where people are regularly listing properties for sale. If the bottom dropped out of the housing market it could impact heavily on REA Group’s revenues.

Secondly, October was a particularly volatile month for global markets. Many of the most highly valued stocks on the ASX were sold off heavily as investors chose to take some profit off the table and de-risk their portfolios. Tech growth stocks like Appen Ltd (ASX: APX), Afterpay Touch Group Ltd (ASX: APT) and WiseTech Global Ltd (ASX: WTC), whose share prices have exploded over the last year, were all savaged in October, and unfortunately, REA Group couldn’t escape the rout.

The turnaround in the REA share price came after the company released its first quarter FY19 results. Despite a 3% decline in property listings, REA Group still managed to grow its revenues by 17% versus first quarter FY17 to $222 million. And while operating expenses increased by 10%, EBITDA was still up 23% to $131 million and free cash flows were up 52% to $52 million.

Some of the growth came via the Hometrack Australia business, which REA Group acquired in June for a reported $130 million. Hometrack provides a suite of property data analytics tools including valuation models, and REA expects that it will add an additional $14 million to $16 million in revenues for the year.

Foolish takeaway:

With its most recent quarterly results, REA Group has shown that it can continue to deliver strong revenue growth even in tightening property market conditions. Management seems confident in its full-year strategy in Australia and has also noted that its operations in Asia are growing as well.

These results have gone a long way to reassure shareholders about the company’s long-term prospects and should continue to spur on gains in its share price.

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Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO, Cochlear Ltd., REA Group Limited, and WiseTech Global. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and WiseTech Global. The Motley Fool Australia has recommended Cochlear Ltd. and 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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