Online property advertising business REA Group Limited (ASX: REA) today announced revenue growth of 22% and earnings growth of 31% over the prior corresponding period for the first quarter of 2015.
The stock is up an incredible 420% over the past five years as profits ballooned on the back of its website's growing dominance and the strong domestic housing market.
Almost every Australian will have used the group's realestate.com.au website, when searching to buy, sell, or rent a residential property. Its brand strength and snowballing popularity have allowed REA Group to establish a competitive advantage over rival operators.
Looking ahead the group wants to expand internationally and has recently bought a 19.9% interest in Asia-focused property website operator iProperty Group Ltd (ASX: IPP). Given the large and fast-growing middle classes of Asia it's clear any business able to successfully operate online property websites in the region has a seriously profitable future.
REA Group also recently announced its intention to invest in the U.S.'s third most popular property website Move, Inc. REA is to hold a 20% stake, while the group's part owner News Corp (ASX: NWS) will acquire the other 80% of the U.S. website. REA also has interests in property websites in Italy, France and Luxembourg, with big ambitions to grow its global scale and reach.
The stock has two attractive tailwinds for investors with an eye on the long term. First, it's a digital business that benefits from the network effect by virtue of the dominance of its websites. Sellers, landlords and their agents have little alternative but to use the website if they want their asset to attract the widest possible interest. This makes it hard for competitors as the marketplace naturally gravitates to the website it thinks offers the best potential to successfully trade assets or services.
Second, the long-term asset value of housing is re-assuredly stable the world over, with returns more reliable than almost any other investment sector. Property is a potent asset class and if REA is able to deliver on its international growth plans via brand strength and a proven expertise it looks to have a bright future.
Selling for $45.03 the stock trades on around 29x analysts' estimates for 2015's full year earnings and looks around fair value given the expected growth rates.
