Up 17% per annum: Is this index-beating ASX investment too good to turn down?

This stock has been an incredible investment. Is it a good buy?

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REA Group Limited (ASX: REA) has been an incredible ASX investment over the long term. In the last five years, the online real estate advertising company has delivered total shareholder returns (TSR) of an average of 17% per annum, as shown in the chart below.

The company has built an impressive collection of real estate-related businesses including realestate.com.au, realcommercial.com.au, PropTrack, Mortgage Choice, Property.com.au, Campaign Agent, Realtair, Managed Platforms, Simpology and Arealytics.

Let's explore three crucial factors that I think make it a great business and then examine the valuation.

Market-leading position

REA Group has developed its property website realestate.com.au into the market leader in Australia. According to the ASX company, an average of 11.2 million people visit realestate.com.au each month, with 52% forgoing competitors to utilise the company's portal exclusively.

Realestate.com.au receives 130 million average monthly visits, which is 4.1 times more visits than the nearest competitor.

Having the strongest market position allows the company to implement impressive price rises with little detrimental effect.

For example, REA Group expects its residential 'buy yield' to grow between 18% and 19% in FY24. In FY25, the buy yield is expected to be "primarily driven by an average 10% increase" in its highest penetrated product, Premiere+.

Excellent financial growth

The solid revenue growth REA Group has delivered over the years, from both price rises and vendors paying for more advanced listing tools, has translated into robust profit growth.

REA Group can deliver rising profit margins on stronger revenue/volume as a digital business. It has already developed the technology and infrastructure, so additional revenue is beneficial for the bottom line and powering the ASX investment.

For example, the business recently reported its performance for the nine months to 31 March 2024. Revenue was up 20% to $1.06 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) was up 23% to $594 million, and free cash flow jumped 39% to $322 million. The company expects listings growth of between 5% to 7% for FY24.

Bigger profits can help support a higher REA Group share price because that's what investors typically focus on.

India potential

REA Group has an important presence in India with its controlling interest in REA India, which owns Housing.com and PropTiger.com.

According to the World Bank, India has a population of more than 1.4 billion. That's a huge potential market. REA India's Housing.com is India's number one property portal, with 1.2 times more web traffic than the closest competitor.

In the FY24 first-half result, REA saw Indian revenue growth of 21% (to $44 million) thanks to price rises, multiple tiers now in the market, and continued customer growth.

As more people in India turn to the internet for property searching and selling, REA India has the potential for an incredible future.

REA Group share price valuation

REA Group is a highly successful business, and its valuation matches that. According to Commsec, the REA Group share price is valued at 54x FY24's estimated earnings.

It's not at a bargain price, but it's forecast to grow earnings per share (EPS) by 46% between FY24 and FY26, putting it at 37x FY26's estimated earnings.

I'd be happy to invest in a small amount of shares today and buy more on any material weakness for the ASX investment in the future.

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 positions in and has recommended 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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