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.
The case for ASX tech shares
The S&P/ASX200 Info Tech Index (ASX: XIJ) has returned 14.42% per year over the last 5 years. That compares to the average of all ASX sectors of 3.33% over the same period. So, here are some of the reasons that investors have been flocking to ASX tech shares.
High Margins
Technology companies tend to have much better margins than more ‘traditional’ brick-and-mortar businesses. That is, they tend to be more profitable.
The simple reason is that they usually have low marginal costs (like distribution costs) and low overhead costs (things like plant and equipment).
In their last annual report, REA reported gross margins of 64.30% and an operating margin of 42.50%.
Recurring revenue
The second reason is that a feature of many tech companies is their recurring revenue. You’ve probably heard the term ‘software-as-a-service’ (SaaS) – this is when companies package their software as a service that customers pay for access to on a monthly or annual basis.
This is a great alternative to selling your software as a product (a one-off payment) because it can smooth revenue across the year and make profits more predictable over time.
Global scale
The third reason investors love tech businesses is because of their global reach. If you have a brick-and-mortar business or sell physical products, your potential customer base can be limited by reach, regulation, or logistics. For example, if you sell food items, trying to sell into a foreign market means dealing with packaging rules, biosecurity regulations, and tariffs or quotas.
Software on the other hand can usually be downloaded by anyone with an internet connection at the click of a button. It’s easy to ‘move’ across borders, opening up markets that may not have been available to a product-based business. Basically, a bigger customer pool tends to mean more customers.
REA share price valuation
As a growth company, one way to put a rough forecast on the REA share price could be to compare its price-to-sales multiple over time. Currently, Rea Group Ltd shares have a price-sales ratio of 19.34x, compared to its 5-year average of 17.41x, meaning its shares are trading higher than their historical average. This could mean that the share price has increased, or that sales have declined. In the case of REA, revenue has been growing over the last 3 years.
Please keep in mind that context is important – and this is just one valuation technique. Investment decisions can’t just be based on one metric.
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! Both of these models would be a better way to value the REA share price.
