REA share price tumbles despite 16% revenue boost

REA shares are falling on Wednesday…

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The REA Group Limited (ASX: REA) share price is trading lower on Wednesday morning.

At the time of writing, the real estate listings company's shares are down 4% to $114.75.

Why is the REA share price falling?

Investors have been selling down the REA share price on Wednesday following the release of the company's first quarter update.

According to the release, REA delivered a 16% increase in revenue to $305 million and an 11% lift in operating EBITDA to $131 million.

This was supported by a 5% increase in national listings during the period and the leadership position of the flagship realestate.com.au website. The latter delivered an average monthly audience of 12.4 million during the quarter, representing 61% of Australia's adult population.

This led to 121.9 million average monthly visits during the period, which is 3.3 times more visits than the nearest competitor.

So why are investors selling?

While this would appear to be a solid quarter, it is worth remembering that REA has been targeting "positive jaws" in FY 2023 with mid to high-single digit operating cost growth.

Positive jaws is when your revenue grows quicker than your costs, leading to margin expansion and earnings growth.

However, first quarter operating costs grew 22% over the prior corresponding period, well ahead of its revenue growth for the period. This was driven by higher employee costs from its continued investment to deliver strategic initiatives, increased marketing, and travel costs.

Though, it is worth noting that management continues to target positive jaws in FY 2023. It commented:

The Group continues to target full year positive operating jaws for Australia in FY23. Australian operating cost growth is expected to be mid to high single-digits, with growth rates varying between quarters given operating expenses in the prior year were more heavily weighted to the second half.

Outlook

Management advised that national residential listings were down 18% in October. But thanks to price increases, the impact of Premiere Plus, and continued growth in depth penetration, management remains positive on its outlook.

REA CEO, Owen Wilson, commented:

We've seen the heat come out of the property market in recent months and while positive underlying fundamentals remain, we expect this moderation to persist as interest rates rise. REA is well positioned in this environment, and we will continue to invest in the growth of our platforms and adjacent businesses to further increase the value we provide to our customers and consumers.

Broker response

Goldman Sachs has responded to the update. Here's what it had to say:

We note full year REA opex guidance has been reduced to high single to low double digit growth vs. low double digit growth previously (GSe +11%) – suggesting REA is more cautious on FY23 listings outlook than previous (forecasted mid single digit declines, noting 1Q23 +5%, with October -18%). Compositionally core Australia revenues was marginally stronger than GSe (+14% despite Finance declines), with India growth also higher than expected (+47% vs. GSe +40%).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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