Is it time to trade in Trade Me?

UBS downgrades the company to "sell" — should you follow that advice?

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

According to a report in The Australian Financial Review, New Zealand's answer to eBay, Trade Me Group (ASX: TME), has been downgraded to a sell by UBS broker Richard Eary. The company is currently trading on 24 times earnings, however Eary expects Trade Me to only grow earnings at around 13% in financial year (FY) 2013. While in its own right 13% earnings growth might sound pleasing, paying 24 times earnings for that growth does not!

A look across the online sector highlights to investors the current necessity for companies to maintain high growth rates, as they are priced for perfection. Put another way, investors who choose to pay a high price for a company because of expectations of a high growth rate become reliant on the company delivering that expected growth; otherwise the share price is likely to re-rate lower and the investor to suffer at least a temporary capital loss.

Three other companies that will need to maintain their high growth rates to justify their high multiples include:

Carsales.com (ASX: CRZ), which trades on close to 26 times FY13 earnings. If Carsales.com can reach consensus earnings for 2014 then the PE does drop closer to 20 times. Webjet (ASX: WEB) currently trades on almost 24 times its historical earnings, while fellow travel market operator Wotif.com Holdings (ASX: WTF) is trading on an FY13 price-to-earnings multiple of 21 times, with earnings growth expected to decline in FY13 but bounce back to double digits in FY14.

The timing of Eary's downgrades couldn't come at a worse time for the sellers and stock brokers of the upcoming iSelect float. With the iSelect IPO priced for perfection and comparisons inevitably made to the valuation of other online businesses, cuts to peer valuation and subsequent falls in the share price of peers won't help the iSelect sales process.

Foolish takeaway

Given the potential ease of entry for multinational competitors into the online classified and comparison advertising space, it is interesting to note the valuations of some potential competitors. Companies including Yahoo!, Google, eBay and Expedia are selling for closer to 15 times earnings. It's always handy if investors can compare the value of an investment against a peer. Where possible it is good to also compare with overseas-based peers, as sometimes the whole domestic market can be over- or undervalued.

The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »