There are few shares on the ASX that have done better over the past decade than REA Group Limited (ASX: REA). In 10 years it has gone up about 1,600%.
However, it's now worth asking whether this top business is worth buying at the moment considering its strong price run.
As I'm sure most readers know, REA Group is the owner of Australia's most popular property site, realestate.com.au. It also owns several other leading Australian property sites like realcommercial.com.au, spacely and flatmates.com.au.
REA Group has created a juggernaut of a property site. Being the number one means it attracts the most sellers, which attracts the most buyers and so on. It's a very helpful circle of business life and why it may always remain ahead of Domain Holdings Australia Limited (ASX: DHG).
Being number one allows it to regularly implement price increases at a strong rate. But because the advertisement price is so low compared to the overall selling cost of the property it's still good value. A price increase with no detrimental effect is a valuable business attribute.
The problem is that REA Group is trading at 33x FY19's estimated earnings. This is fairly expensive considering it's growing at around 20% per year and the growth rate is likely to slow.
There are a number of promising things for REA Group. The property market slowdown should see properties take longer to sell, leading to more advertising revenue. Its loan broking business could become sizeable over time. I'm particularly excited by its overseas investments' potential in the US and Asia – however these are not making a material contribution yet.
Foolish takeaway
It's more attractively priced than some other growth shares like WiseTech Global Ltd (ASX: WTC), but I think there will be a time over the next year or two where it's a more attractively priced on a price/earnings ratio basis.
