When you're looking for a company to invest in, finding one with a superior market dominance, or even a virtual monopoly, is exactly what you're after.
Think Amazon for online shopping, Spotify for music, and in the Australian real estate scene, it's hard to go past Realestate.com.au owner REA Group Ltd (ASX: REA).
That is, until recently, anyway. Up until now, the only real competition to REA Group had been from Domain.com.au, but in reality, REA was wiping the floor with its smaller competitor.
There is the risk that might change now, however, with the US-based CoStar Group Inc (NASDAQ: CSGP) buying out Domain Holdings Australia Ltd in August for about $3 billion.
Image source: Getty Images
'Game on' says CoStar founder
CoStar Founder Andy Florence said at the time the company, which has a playbook of competing aggressively in new markets, was here to take the fight to the incumbent.
As he said:
For too long, agents, buyers and vendors have faced an unbalanced marketplace dominated by an intention to extract value rather than deliver it. Our vision is different. We are building a more compelling user experience at a lower cost – driving greater value for agents, vendors, and buyers alike. We are the agent's ally, and we will never operate at their expense.
But is REA Group's dominance really at risk?
If you ask the team at RBC Capital Markets, the answer is a resounding "no".
REA hard to beat
RBC has just initiated coverage of REA Group, and to their minds, the stock has a long way to run yet.
And what do they think of CoStar's chances?
In short:
We've seen CoStar's playbook when entering new markets and the outcomes in the US and UK residential property markets suggest CoStar is unlikely to materially disrupt REA.
They say CoStar lacks vital elements to be a serious disruptor, including an existing data platform, a differentiated pricing model, and a scale advantage.
CoStar's entry into Australia likely escalates marketing intensity, rather than price competition. REA's structural dominance via network effects (about 85% buyer engagement, about 72% website visits) and the vendor paid advertising model make meaningful disruption in Australia difficult.
The RBC team believe that REA Group will be able to maintain its pricing power despite CoStar's entry into the market, and continued property price inflation "should sustain low-teens yield growth in the medium term''.
So the real question – how much do they think the stock is worth?
The RBC team have started their coverage with an outperform rating and a price target of $270, a full 23.8% higher than where the shares closed on Monday. And don't forget the company also pays a modest dividend with a yield of slightly more than 1%, fully franked.
So while "safe as houses" might be a bridge too far, if the RBC team is to be trusted, you can probably rest easy with your money in REA Group shares.
