Could rent.com.au be the next REA Group Limited?

Rising slightly since launch today, rent.com.au has many attributes in common with REA Group Limited (ASX:REA), but is it a good deal?

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After exciting news of an upcoming National Vet Care Initial Public Offering (IPO), a second prospective launch caught my eye in Fairfax media this morning – rent.com.au.

Listing on the ASX through a backdoor takeover of Select Exploration Ltd (ASX: RNT), Australia's leading home rental website commenced trading on the ASX today at $0.21, just above its issue price of 20 cents per share.

Management has pitched Rent.com.au as the home for property rentals – not sales – and say they currently have around 80% of the market and are targeting the remaining 20%. They hope to follow in the footsteps of companies like REA Group Limited (ASX: REA), Seek Limited (ASX: SEK), and Carsales.Com Ltd (ASX: CAR) by using the power of network effects to deliver self-reinforcing growth, a powerful moat and phenomenal profits over the long term.

However, the company is as yet unprofitable and management is reportedly gearing up to increase staff numbers fivefold (from 6 to 30) over the next 12 months and move to profitability in the medium term with the possible upside of eventual expansion into Asia.

With the website content and technological investment already completed, management is also aiming to more than double the number of unique visitors to the site from 230,000 to 500,000 within the next 12 months.

Part of the joy of this type of company is the 'network' effect whereby the business with the most sellers naturally attracts the most buyers (because of the wide range of products) and a growing number of buyers naturally attracts more sellers because of a greater target market. As more people are satisfied in one location, fewer will look elsewhere and in this way a company can generate a sizeable moat.

Much will depend on rent.com.au's ability to generate this kind of self-reinforcing growth, and to my mind the company is quite vulnerable at present to established players like REA Group, should it decide it also wants to dominate the rental market.

IPOs also come with greater uncertainty and risk (particularly when they are unprofitable, as rent.com.au is) and often trade below their issue price in the first 12 months. I'm not a buyer of rent.com.au until I see a few updates on how the company is travelling, but a price of $0.20 appears relatively undemanding and the promise – the next REA Group – is an attractive one.

Rent.com.au is definitely worth a closer look.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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