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Is the Domain share price a buy, or is it overshadowed by REA Group?

There is no doubt that FY19 was very challenging for online property classifieds site Domain Holdings Australia Ltd (ASX: DHG). During that time residential property listings declined in our capital cities, especially in Sydney and Melbourne, due to the downturn in the housing market.

Domain’s FY19 financial results were disappointing, with adjusted revenue of $302.3 million down by 6.1%, and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of $96.6 million down by 14.7%. However, there have been positive signs since then, with the Domain share price increasing by 40% since last August, and the housing market now picking up strongly.

New strategy initiatives

As Domain is now part-owned by the merged Fairfax Group/Nine Entertainment Co Holdings Ltd (ASX: NEC), the entity has begun to leverage its broadcast and digital assets to direct traffic towards its website and other services. Rival REA Group Limited (ASX: REA) has been following a similar strategy for years, as it is majority owned by News Corp (ASX: NWS).

Also, Domain is branching out into digital display advertising and enterprise-facing property data services for real estate agents.

How do property classifieds compare?

When looking at the online property classifieds market, I think it is very useful to view it in relation to the other 2 key segments of Australia’s online classifieds market – employment and automotive – to gain a wider market perspective.

In both markets, one player dominates the market, and has an overwhelming market share of revenues and listings.

In the online employment classifieds market, SEEK Limited (ASX: SEK) has the overwhelming market share and in the online automotive classifieds market, Ltd (ASX: CAR) dominates. Going back to a decade ago, Seek had 2 major competitors, one of which is still operating, namely CareerOne, however its market share is now very small compared to Seek’s.

Often what happens in online markets is that the larger provider ends up dominating the market. Just look at what happened with Google and eBay, both of which had a number of large online competitors earlier in their development.

This occurs because a network effect is created when a company’s product creates a cycle where each extra user strengthens the underlying product. As the site gets bigger, this attracts more users, and eventually the point is reached where it dominates the market. This is exactly what happened over the last decade in the online employment classifieds market, with Seek coming out on top.

In contrast, there are still 2 major providers in the online property classifieds market: REA Group and Domain.

Is there room for 2?

So far, yes, and we will have to wait another 5 to 10 years to see if anything changes from that perspective. In any future battle for survival, I think REA Group would be the likely winner.

For a start, it is currently far larger than Domain. The average site visits to across all platforms each month are nearly 3 times than that of Domain. REA also has a distinct advantage due to its overseas operations, which are the fastest growing segments of its business. In contrast, Domain only has domestic operations. Both REA Group and Domain are struggling to get further high growth in the more mature Australian property classifieds market.

In addition, in terms of strategy I have always seen Domain as more of a follower of REA Group, rather than a market innovator. Domain also has a higher price-to-earnings ratio of 57.8 than that of REA Group (48.7).

Foolish takeaway

Although I believe that online property classifieds segment is a good segment of the share market to enter, I would pick REA Group as the better choice.

There is no doubt that Domain is a high-quality business, with great products, and good positions in property markets around Australia, however I prefer REA Group due to its larger size and exposure to overseas property markets, which is where I see the most growth over the next 5 years.

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Motley Fool contributor Phil Harpur owns shares of Limited, REA Group Limited, and SEEK Limited. The Motley Fool Australia has recommended Limited, REA Group Limited, and SEEK 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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