Can the REA share price turn over a new leaf in 2022?

REA recently provided investors with its new strategy to turn its fortunes around.

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Key points

  • REA shares are down 34% so far this year
  • Management recently released its investor presentation targeting double-digit growth and EBITDA in the coming years
  • Brokers Goldman Sachs and Morgans both think the REA share price is currently undervalued

The REA Group Limited (ASX: REA) share price has been in a funk since the start of the year, plunging by 34%.

The property listings business announced its third-quarter results last month and it failed to impress.

At yesterday’s market close, the REA share price finished at $110.47, down 1.73%.

REA unveils bold new strategy

Investors have been selling off REA shares after the company missed its third-quarter estimates due to deteriorating macro trends.

While it delivered a softer than expected financial performance — which saw the REA share price fall 8% on the day the update was released — this didn’t stop the company from presenting an upbeat strategy last week.

Management highlighted that the company will evolve from a residential listing portal to a property, finance, and data business. This will see REA diversify its revenue stream and expand into financial services, data, and international operations.

As such, the upper echelons of REA are targeting “double-digit revenue growth and EBITDA [earnings before interest, taxes, depreciation, and amortisation] through the cycle”.

REA noted that on average the property cycle is roughly between three and five years.

Driving the bold forecast will be continued growth in traditional advertising, next-generation marketplaces, scaling adjacent businesses, and bolstering the India portfolio.

REA has achieved great success in Australia with realestate.com.au becoming the country’s leading residential and commercial property website, according to the company.

On average there are 127 million monthly visits to the website on all platforms. To put that into perspective, it’s 3.3 times more visits than the company’s nearest competitor.

As the company states, having a large and highly engaged audience in the marketplace is critical to driving value. This provides REA with strong lead generation to fuel future growth.

And despite the current environment of rising interest rates and falling property prices, REA is not fazed.

Management stated that it’s confident sales volumes will remain robust as demand is still apparent.

What do the brokers think?

A couple of brokers weighed in on the REA share price last week.

Analysts at Goldman Sachs raised their price target by 2% to $167. Based on the current share price, this implies an upside of around 51%. Clearly, the broker believes there is still significant value in the property listings business despite the short-term volatility.

On the other hand, Morgans had a more bearish tone, slashing its 12-month rating by 1% to $144. This represents an upside of 30% from where REA shares last traded at Monday’s market close.

About the REA share price

Over the last 12 months, REA shares have dropped by around 33%.

The company’s share price is treading 5.5% above its 52-week low of $104.37.

On valuation grounds, REA commands a market capitalisation of roughly $14.85 billion.

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs. 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 Scott Phillips.

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