Will REA Group Limited or Carsales.com Ltd be Australia's next international success story?

Does REA Group Limited (ASX:REA) or Carsales.com Ltd (ASX:CAR) have a better international strategy?

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With company results season in full swing, investors get a valuable insight not just into the profit numbers of the past year, but the direction for future years.

And as business models mature in Australia, it is natural for management to look overseas for new growth. This is exactly what is happening with two of Australia's most successful digital disruptors over the last decade. So which one has the better strategy for adding earnings from international markets?

Money in real estate

REA Group Limited (ASX: REA) is the number one property portal in Australia, and has been for some time. Even in the face of regular price rises, premium advertising rates and a resurgent competitor in Domain.com, REA Group has continually grown its share of a booming market.

Recent results showed a 24% rise in underlying net profit to $185.4 million. Meanwhile, revenue only lifted 20%. This is a great sign for shareholders as it means that profits are "dropping down" to the bottom line more efficiently as the business grows.

REA Group has several irons in the international fire. The most recent was an investment alongside News Corp to buy the number three property portal in the United States, Move Inc, which operates the realtor.com portal. Visitor numbers to the website have grown by over 50% in less than a year, in part driven by increased exposure in News Corp papers and websites.

It also has a substantial 21.33% stake in Asia focussed iProperty Group Ltd (ASX: IPP).

Lesser known investments have also been made in France, Italy, Luxembourg and Germany. However, investors should not ascribe too much value to these stakes, as they only account for $45.6 million in revenue, compared to $522.9 million across the whole group.

International rubber hitting the road

Carsales.com Ltd (ASX: CAR) has cemented a dominant position in car advertising locally. Even in the face of a clever marketing campaign from rival Carsguide, and free advertising online available on Gumtree, Carsales.com maintains a dominant market position.

It has used this solid footing to expand laterally into other areas including boats, trucks, farm machinery, motorbikes and tyres as well as car finance.

Car finance was a major contributor to the 32% increase in revenue to $311.8 million. In time, Tyresales.com.au is forecast to be a much more substantial contributor to earnings, as Australians buy new tyres for their cars far more often than they buy new cars.

However, these results also showed traction in the international divisions.

In South Korea, SK Encar reported revenue growth of 31% and net profit growth for the period of 488% to $4.7 million, off a low initial base. In other parts of Asia, Carsales.com also has a minority investment in the loss-making iCar Asia Ltd (ASX: ICQ).

In Latin America, investments in Brazil remained profitable, even after integration of an acquisition to solidify market position reduced net profit to $3.5 million. The company also recently announced an expansion into Mexico, where it will partner with the local owner to grow website traffic and the business model.

The standout winner?

Of the two contenders, there is no clear winner, but Carsales.com appears to have a slight edge. That is because each market it has expanded into has the potential to be larger than Australia in terms of contribution to group earnings, and each has a long way to go in terms of internet penetration and e-commerce, meaning there is room to grow with favourable tailwinds.

Selling cars is also arguably more uniform and less subject to localisation and "translation" difficulties than selling property, where each market has its own priorities and cultural imperatives.

In addition, car sales are less volatile than property transactions. The quality of the US expansion of REA Group is also questionable, with the company's own experience showing that being number two or number three is a difficult position to make a profit from.

Motley Fool contributor Ry Padarath 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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