Why the REA Group share price is on my hold list

The REA Group Limited (ASX: REA) share price has rallied 4.5% on Tuesday. Is it a buy?

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The media continue to report on the declining property market but, despite that, the REA Group Limited (ASX: REA) share price has rallied 4.5% on Tuesday.

Is it time to add REA Group shares to your portfolio?

The REA Group share price has taken a battering in FY2019, due to a storm of pessimistic media regarding the Australian property market.  It is currently trading ~19% below its 52-week high of $94.12 on a P/E of 31.

When looking at the bull case for REA Group, the online advertising company is currently the dominant player in the Australian market.  It has the largest and most engaged audience, with monthly user traffic across all platforms 2.8x greater than its competitors.  Along with this, the average time users spend on the REA app is 5x greater than time spent on others.

Having a large captured audience allows REA Group to slowly expand pricing margins to agents listing REA properties, as consumers are more likely to use this platform than another.  This is partly why the company are confident in citing that "Revenue growth is expected to exceed the rate of cost growth for both the second half and full year".

Looking at financials, earnings per share are currently at $2.10 and are expected to grow to $3 by FY2020.  Along with this, dividends per share should increase relatively.

When looking at the bear case for REA Group, it is well documented that the company faces a challenging short term due to the declining property market.  The specific issue is that listings are expected to be lower than previous periods, particularly in Sydney and Melbourne.

Due to the love affair that Australians have with the property market, the negative rhetoric from the media regarding prices has now flowed through to the common chit chat around family barbeques and conversations amongst friends. All the talk has been about the declining conditions and it will now take time for any future good news to flow through.

Along with the effect that property price news has on the company, the continued microscope on mortgage lending may provide further headwinds to the share price.

Foolish Takeaway

Whilst REA Group could reflect a great buy and hold opportunity, current property market dynamics present a rocky short-term outlook.  It seems to find support around $70 per share, where technical analysts begin to think it's cheap and buy up.

Once the public start to become a bit more positive towards the housing market, I'd start considering a purchase but for now, I'd suggest a hold.

Motley Fool contributor Michael Guinery owns shares in REA Group. 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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