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How you can value REA and A2M shares

The Rea Group Ltd (ASX:REA) share price has risen 25.3% since the start of 2024. It's probably worth asking, 'is the REA share price top value?'
The Rea Group Ltd (ASX:REA) share price has risen 25.3% since the start of 2024. The A2 Milk Company Ltd (ASX:A2M) share price is about 48.1% off its 52-week low.

REA share price in focus

REA Group, best known for its realestate.com.au platform, is a Melbourne-based real estate advertising company majority-owned by News Corp.

Today, REA Group operates property websites in around 10 countries used by some 20,000 agents. In a typical month, the core Australian website gets over 55 million visits. While the business has diversified globally, Australian operations still account for the bulk of revenue. Within Australia, REA makes money by listing properties for sale or rent and charging listing fees. They also have a financial services arm offering services like mortgage broking, but this is a much smaller part of the business.

REA’s competitive advantages, like any other established platform, are network effects and economies of scale. In other words, Domain (the #2 market player) is significantly smaller than REA in terms of users and views. This gives REA greater market power and pricing control. REA also benefits from owning assets across all parts of real estate, including listing, advertising, mortgage broking, and house sharing.

A2M shares

Founded in New Zealand in 2000, The a2 Milk Company sells dairy products which contain the naturally occurring A2 protein type. Most other dairy products on the market contain the A1 protein, which is claimed to be harder to digest for some people.

The company is responsible mainly for distribution and marketing, with the production outsourced to suppliers who source from over 25 certified dairy farms across Australia. A large part of the a2 business is infant formula, which is produced by its supply partner Synlait Milk in New Zealand.

While the science is a little uncertain on why a2 milk might be easier to digest, randomised studies have repeatedly shown that it is an effective solution for many people who struggle with ‘normal’ dairy products.

REA share price valuation

As a growth company, one way to put a broad projection on the REA share price could be to compare its price-to-sales multiple over time. This can tell us how the company has historically been valued relative to its total revenue.

Currently, Rea Group Ltd shares have a price-sales ratio of 18.12x, compared to its 5-year average of 17.41x, meaning its shares are trading above their historical average. This could mean that the share price has increased, or that sales have declined, or both. In the case of REA, revenue has been growing over the last 3 years. Of course, context is important – and this is just one valuation technique. Investment decisions can’t just be based on one metric, but this can be a rough starting point.

The A2M share price currently trades at a price-sales ratio of 2.97x, which compares to its 5-year long-term average of 3.44x. So, A2M shares are trading lower than their historical average. Don’t forget, a simple multiple like this should only be the start of your research. The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! It’s a good idea to use multiple valuation methods to value a share like A2 Milk Company Ltd.

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