Almost everyone in Australia knows that if you want to buy, sell, rent or invest in property, the first place to go to is realestate.com.au. The site's owner, REA Group Limited (ASX: REA), is a digital media business specialising in property. In addition to maintaining a leading position in Australia, it has interests in digital property businesses in North America, Europe and Asia.
REA Group has been posting solid growth in sales and profits, resulting in a rise in its share price from $3.60 on January 2, 2009, to $39.37 as of June 5, 2015. That is a return of more than 1,000% in only four-and-a-half years.
Today its share price is trading at a price-to-earnings ratio of 27. From a valuation perspective, this is high, possibly indicating that the stock is overvalued. But the key question is whether the stock is really overvalued or may still have many years of growth ahead of it.
REA Group earns most of its revenue from Australia, where it is the market leader when it comes to buying or selling property. Its expansion in international markets is relatively small but has the potential to increase substantially.
To get an idea of how far ahead REA Group is from its competition, the average number of people visiting realestate.com.au is 33.2 million per month. The nearest competitor can only attract 9.9 million visitors to its website in a month.
In the residential property listing market, realestate.com.au accounts for 92.8% of all listings nationwide in Australia. REA Group posted a 21% increase in revenue for the nine months ending March of FY15.
REA's business performance is impressive. The property business is booming and it has come to rely on online property websites like realestate.com.au. In good times when people are buying property or in tough times when they are selling property, they will continue to need the services of a property website with a market-leading position.
Not only that, pundits are suggesting that there is a shortage of property in Australia and as the population is expected to rise, the demand for property will also rise.
Foolish takeaway
In my view, REA Group is a highly successful business that has established itself firmly in the Australian market. It enjoys a wide moat, which is a strong indicator of competitive advantage. It should continue to grow strongly in the future. I recommend buying shares between $35 and $42.
