Why has the REA share price crashed by 40% in 2022?

This blue-chip market darling has been struggling all year in 2022.

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Key points

  • The REA share price is down 6.18% today, falling below the $100 mark for the first time since the COVID-19 crash in February 2020
  • Year to date, this market darling stock has lost 42% of its value 
  • There are three main headwinds facing the company today 

REA Group Limited (ASX: REA) is having a tough time in the market in 2022. The REA share price is down 6.18% at the time of writing and has fallen below the $100 mark for the first time since the COVID-19 crash in February 2020. Year to date, REA shares are down 42%.

The question is, why?

Let’s look at the headwinds for the real estate classifieds giant that could be affecting its share price.

The ASX tech share sell-off

REA is an ASX tech share and the second-largest constituent in the S&P/ASX All Technology Index (ASX: XTX) by market capitalisation. And we all know what has happened to tech shares in 2022.

The tech sell-off is the first headwind for the REA share price. The All Tech index is down 39.6% year to date. Ouch! But consider what this means, given REA is down by almost the same amount.

You know the saying, ‘Don’t throw the baby out with the bathwater’? Well, that’s what some ASX investors may be doing with REA.

Tech shares are getting hammered and REA appears to be going down with its sector compatriots.

Tech shares are out of favour right now because of economic conditions. Many ASX tech companies are young and not yet profitable. Many also have large debts required to fund their growth. So, rising inflation and interest rates aren’t good for them.

But REA isn’t a young company. It’s certainly both an ASX tech share and a growth share, but it’s also an established and profitable business. In its Q3 update for FY22 released last month, REA reported 27% year-on-year (YoY) growth in earnings before interest, tax, depreciation and amortisation (EBITDA) to $523 million for the first nine months of FY22.

Missing the mark as house prices decline

That third-quarter report is actually the second headwind, though. The results missed some analysts’ estimates and the REA share price lost 8% in value on the day they were released.

The third headwind is cooling conditions in Australia’s two biggest property markets, Sydney and Melbourne. Any negative news about property prices tends to put ASX investors off REA.

If we look at recent historical price movements, there’s a clear correlation between the REA share price and Australian property prices.

For example, the REA share price began rising in 2019 at the same time as the property market began its recovery from the 2017/2018 downturn.

The company’s shares also skyrocketed during the pandemic to an all-time high of $180.67 in November 2021 — just as CoreLogic was reporting the fastest annual growth in national home values since 1989.

In the three months to May 31, the median house price has fallen 1.3% in both Sydney and Melbourne, according to the latest CoreLogic data.

Is this a buying opportunity?

REA is a market darling stock that has delivered incredible share price gains over the long term.

Over 10 years, the REA share price has ascended 645%. Let’s compare that performance to a couple of other darlings.

Macquarie Group Ltd (ASX: MQG) shares have grown by 940% over the same time frame. CSL Limited (ASX: CSL) shares are up 672%, Rio Tinto Limited (ASX: RIO) shares are up 106%, and Commonwealth Bank of Australia (ASX: CBA) shares are up 80%.

So, it’s certainly fair to say REA has one of the most outstanding histories for share price growth among the ASX 200 blue chips.

A few brokers see the current weakness in the REA share price as an opportunity to buy the dip.

What the experts think of the REA share price

REA recently released an investor presentation outlining its evolution from a residential listing portal to a property, financial services, and data business.

Morgans liked what it heard and retained its add rating on REA shares with a slightly reduced price target of $144.

Goldman Sachs is more bullish. It has a buy rating on REA and a $167 price target on the shares.

The broker likes that REA management “remains confident it can achieve double digit revenue/EBITDA growth through the cycle with positive jaws”.

Furthermore, Goldman said:

Overall, we believe these commitments illustrate the pricing power of REA, pipeline of value-add products, and its ability to offset any potential macro weakness, and now forecast FY22-24E Sales growth of 10% despite challenging volume listings.

A recent Market Matters report also suggested REA could be worth buying.

As we reported, the Market Matters team said: “[Tax loss-selling] can often send already depressed stocks down into oversold/deep value areas, which can be attractive for the well-informed investor. The key is determining the difference between value and a company simply in trouble.”

Market Matters said REA was among three examples of “quality” ASX shares that might be in this boat.

The report said REA is an “almost monopolistic-style business” with “useful pricing power”.

Market Matters said REA would be “compelling” when its share price fell below $100 — which it has today.

Motley Fool contributor Bronwyn Allen has positions in CSL Ltd., Commonwealth Bank of Australia, Macquarie Group Limited, and REA Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL Ltd. and Goldman Sachs. The Motley Fool Australia has recommended Macquarie Group Limited and 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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