REA shares vs. Domain: Here's Goldman Sachs' verdict

These digital property advertising companies offer the same services but only one is ripe for investment.

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When it's time to search for a new home to buy or rent, the first port of call for many Australians is the property advertising websites realestate.com.au and domain.com.au.

Both REA and Domain essentially offer property sellers and real estate agents the same services.

But top broker Goldman Sachs says only one is ripe for investment today, and that's REA Group Ltd (ASX: REA) shares.

Here's why.

The outlook for digital real estate advertising

Goldman Sachs sees some tailwinds for both REA shares and Domain Holdings Australia Ltd (ASX: DHG) at the moment.

These include pricing power, given the effectiveness of digital real estate classifieds and the fade-out of print media property advertising, along with an anticipated increase in listings for sale or rent.

The broker estimates a 6% or more lift in national listings over FY24 vs. REA's 3% to 5% estimate, followed by another 2% growth in FY25. This would bring listing volumes into line with the FY08 to FY24 average.

Top broker says REA shares a better investment than Domain

REA shares could go to $202 within 12 months

The realestate.com.au website is the no. 1 player in the digital real estate advertising space.

Goldman Sachs has a buy rating on REA shares with a 12-month share price target of $202.

REA shares closed at $180.40 yesterday, up 1.98% for the day.

So, Goldman sees a potential 12% upside for investors who buy REA shares at this price level.

In a new note published this week, the broker said REA shares have one of the best risk/reward profiles in its domestic media coverage.

This is largely because REA has the greatest capacity to raise its prices.

Goldman believes that advertisers' budgets will increase over time and REA is currently under-monetising its lead generation offering.

The broker said industry feedback was that REA would implement a 10% price rise in FY25, following increases of 13% in FY24, 6% in FY23, and 8% in FY22.

Goldman commented:

We believe REA is among the highest-quality names in our coverage, given it has the highest ability to continue to drive pricing …

We also see the current negative sentiment around AU property as more a driver of share prices over earnings.

The broker says REA shares are trading on multiples that are in line with historical levels of 25.1x EBITDA.

However, the broker notes that a key downside risk for REA shares is a greater-than-expected decline in Australian property listings due to the impact of high interest rates on market activity.

There's also the risk of lower-than-expected advertising yield growth and greater-than-expected cost inflation, given investments into staff or marketing.

Domain shares could rise more than 10%

The domain.com.au website is the no. 2 player in digital real estate classifieds today.

Goldman Sachs is neutral on Domain shares with a 12-month share price target of $3.50.

Domain shares closed at $3.14 on Friday, up 4.32% for the day. So investors who buy at this price level are looking at a potential upside of 11.5%, which is only just inferior to REA shares at 12%.

So, why the neutral rating?

The top broker explains that while REA and Domain both have pricing power today, there may come a time when vendors will choose one portal over the other.

This is a bigger risk for Domain given REA is the dominant player in digital property advertising.

The broker said industry feedback was that Domain would raise prices by 9% in FY25. This would follow a 12% increase in FY24, a 7.5% increase in FY23 and a 10% rise in FY22.

Goldman says:

… we do see elevated risks of vendors consolidating marketing spend over time towards 'depth on one portal', away from DHG.

Hence, with valuation broadly in-line with pre-covid levels we see a balanced risk/reward for DHG.

Future catalysts include: improvement in market listings, further adoption of DHG's marketplace products and through the cycle double digit controllable yield growth …

Goldman said the key risks for Domain, which may produce better or worse outcomes, are competition from REA and other new market entrants, disintermediation, and housing market strength.

Latest figures show the national median home value rose for the 15th consecutive month in April.

Motley Fool contributor Bronwyn Allen 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 Group and REA Group. The Motley Fool Australia has recommended REA Group. 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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