Shares of realestate listing giant, REA Group Limited (ASX: REA), went into a tailspin in early trade today falling as much as 6% after the group released its third quarter trading update.
For the nine months ended 31 March 2015, the owner of Australia's realestate.com.au reported revenue of $384 million, up 21% over the prior corresponding period in 2014, with segment EBITDA (earnings before interest, tax, depreciation and amortization) of $210 million, up 30%.
The company said the results were driven by "continued success of our product strategy which saw Australian residential depth revenue increase by 38% this quarter against the prior corresponding period." It achieved the strong revenue jump despite residential listing volumes declining 7.2%.
In response to a resurgent Domain Group – owned by Fairfax Media Limited (ASX: FXJ) – REA Group used today's ASX announcement as an opportunity to assert its dominance in the Australian online realestate listing space.
REA Group cited recent research which found it had almost 93% of all residential property listings in Australia, ahead of its next closest rival at 67% share. The company also said its unique audience reached a record 4 million in March 2015, 1.5 million more than its nearest competitor.
Our result highlights our leadership position and the continued growth of our business," REA Group CEO Tracey Fellows said. "Our focus remains on what really matters to our customers and consumers – delivering the best digital property experience in the market."
Why have REA Group shares taken a hit?
REA Group shares enjoyed blistering growth leading up to 2014 as investors' expectations got well ahead of profit growth. However over the past year REA Group shares have actually fallen 6% as the company continues to catch up with high expectations.
This is common problem which growth' investors often find themselves in. Whilst REA Group undoubtedly has good economics it also has to invest heavily to sustain its competitive advantage, as its product is at risk of becoming commoditised.
Whilst today's share price movements may be an overreaction (after all, 21% revenue growth is impressive!) it remains richly priced. Indeed, at market close yesterday, REA's shares were changing hands at 42 times last year's profits per share. Such a high valuation says to me that investors are pricing in robust growth for many years.
Given that we could be at the top of the property market cycle, such high rates of revenue growth may not be sustainable over the medium term.
