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2 ASX shares worth watching: REA and A2M

The Rea Group Ltd (ASX:REA) share price is up 33.8% since the start of 2024. It's probably worth asking, 'is the REA share price good value?'
The Rea Group Ltd (ASX:REA) share price is up 33.8% since the start of 2024. Meanwhile, the A2 Milk Company Ltd (ASX:A2M) share price is 33.5% away from its 52-week high.

REA share price in focus

Founded in 1995, REA Group is a Melbourne-based real estate advertising company that is majority-owned by News Corp. In Australia, it’s best known for its Realestate.com.au platform.

REA Group operates on a global scale and now 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 lion’s share of revenue. Within Australia, REA makes money by listing properties for sale or rent (i.e. the agent uses REA’s website to show properties, which the property owner is on the hook to pay). It also makes money from financial services (e.g. mortgage broking), but this is a much smaller part of the business.

The competitive advantge that REA has is the same as any other established platform: network effects and economies of scale. In other words, Domain (the #2 player) is meaningfully behind REA in users and views, which means REA can continue to control pricing and market dynamics. 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, some of the trends we might investigate from REA include revenue growth, profit growth, and return on equity (ROE). These measures can indicate the growth rates and prospects of the company, as well as their ability to generate returns from their assets.

Since 2021, REA has grown revenue at a rate of 18.6% per year to reach $1,677m in FY24. Over the same stretch of time, net profit has fallen from $323m to $303m. REA last reported a ROE of 18.9%.

Over the last 3 years, A2M has increased revenue at a rate of 11.6% per year to hit $1,673m in FY24. Meanwhile, net profit has increased from $81m to $168m. A2M’s last reported ROE was 12.8%.

Please keep in mind that context is important – these metrics give us some indication of company performance, but it’s just the start of valuing REA or A2M shares. To learn more about valuation, check out one of our free online investing courses.

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