The REA Group Limited (ASX: REA) share price bounced from early losses as investors couldn't quite decide what to make of the online property website's quarterly earnings update.
The REA Group share price slumped by nearly 2% at the open before turning around to rally 1% higher at $81.92 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is trading flat.
The outperformance of REA Group stands in contrast to its peer Domain Holdings Australia Ltd (ASX: DHG) as its share price tumbled 2.4% to $3.04 at the time of writing as the former might be stealing market share from Domain.
What the market likes about the results
At least that's what the bulls would be hoping after REA Group announced a 13% increase in revenue after broker commissions to $667.8 million for the nine months to end March this year compared to the same period in FY18.
Just as pleasingly, margins are ticking up with earnings before interest, tax, depreciation and amortisation (EBITDA) improved by 15% to $404.7 million and free cash flow increased 23% to $227.9 million.
While listings are down, particularly in Sydney and Melbourne, demand for its premium advertising products and the earnings contribution from the acquired Hometrack business offset the weakness.
Cracks in the growth story
However, it isn't all good news. Management told investors not to expect housing market conditions to improve anytime soon, particularly since listing numbers will be negatively impacted by the super long Easter and ANZAC Day weekend along with the upcoming federal election.
These events have caused what the company described as "an exaggerated decline" of 22% in listings for April with Sydney down a massive 39% and Melbourne by 35%.
This also means investors shouldn't bank of on the same rate of margin growth going forward. In fact, 3QFY19's EBITDA growth of 6% is 1 percentage point under revenue growth when compared to the same three months last year.
However, management is still forecasting the rate of revenue growth will exceed cost growth for the full year.
Foolish takeaway
Investors with a longer-term investment horizon might be willing to overlook the dour outlook and ongoing housing slump as there are some early signs that the deterioration in the market is slowing. There are also expectations that the Reserve Bank of Australia will the cash rate in the coming months (it might even do two cuts before the year is out), and that would give the housing market a much-needed boost.
On the other hand, I don't think REA is a bargain when it's trading on a FY20 consensus price-earnings multiple of around 29 times. While that doesn't look like much compared to the historical P/E band the stock has traded in, I would be looking for a stock with far fewer headwinds if I were to pay close to 30 times earnings.
On that note, the experts at the Motley Fool may have a better alternative for investors looking for growth.
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