Is the REA Group (ASX:REA) share price a clear buy after dropping 14% in less than 3 weeks?

Are REA Group shares a real opportunity after significant declines?

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Key points

  • The REA Group share price has fallen 14% since 4 January 2022
  • Property listings are booming, which is adding to REA Group’s revenue and earnings.
  • Ord Minnett currently rates the business as a buy

The REA Group Limited (ASX: REA) share price has fallen 14% in less than three weeks.

ASX share market volatility might be opening up some opportunities according to some analysts.

Whilst share prices do move around week to week, it has been both a painful week and painful month for plenty of the leading ASX growth shares.

Ord Minnett reckons that REA Group is one of the best businesses on the Australian Stock Exchange and it’s worth taking a look at the company after these recent declines.

REA Group share price target

Brokers regularly release notes and price targets on businesses. The note tells investors their latest thoughts on a business and the price target reflects where the broker thinks the share price could be trading in 12 months.

Broker Ord Minnett has a price target of $165 on the business.

How is the property market going?

REA Group’s profit is not directly correlated to how house prices are going.

There are two key inputs for the owner of realestate.com.au. First, what price is it able to charge for property owners to advertise on the website? Then, how many property listings are on the site?

Whilst REA Group does regularly increase the prices that it charges for advertising, the number of listings is significantly increasing.

In the first quarter of FY22, REA Group reported that revenue (excluding acquisitions) increased by 22% year on year. National listings increased 11% for the quarter, with Melbourne up 79%. Australian residential revenue increased for the quarter, benefiting from increased depth and ‘premiere’ penetration, listings growth, the contracted price rise from 1 July 2021 and continued growth in add-on products.

Quarterly free cashflow was up 29%, excluding acquisitions, to $49 million.

When telling investors about trading in October, it revealed that national residential listings were up 16% year on year.

In reporting regarding the number of homes expected to go under the hammer this weekend, the Australian Financial Review noted that 461 properties were scheduled for auction for the week ending 23 January 2022, an increase of 40% from a year ago as sellers look to capture remaining buyer demand and get ahead of competition.

The AFR quoted CoreLogic head of research Tim Lawless who said that volumes could remain high for the rest of the year:

If you’ve owned a property over the past couple of years you’ve seen a lot of equity created, so now is probably be a good time to cash out.

So, I wouldn’t be surprised if we do see an elevated number of auctions being held this year, which means clearance rates won’t hit those frothy highs in the early-to-mid-80 per cent or 70 per cent that we saw in the last quarter.

We might see demand diminishing further due to affordability and the prospect of interest rate hike this year and further tightening of credit policies.

REA Group share price valuation

After the recent declines, Ord Minnett puts the REA Group share price at 48x FY22’s estimated earnings and 40x FY23’s estimated earnings.

As a reminder, Ord Minnett has a price target of $165 with a buy rating on REA Group.

Should you invest $1,000 in REA Group right now?

Before you consider REA Group, you'll want to hear this.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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