Why I think the REA share price is a bargain buy right now

Real estate agent and client exploring property.Real estate agent and client exploring property.

The REA Group Limited (ASX: REA) share price has fallen heavily in 2022. After its big drop, I think it could be a good opportunity.

This business is one of the ASX’s big success stories. It has gone from being a small company to a business worth more than $15 billion, according to the ASX.

I believe a portfolio full of quality businesses can do well over time. Big declines could prove to be opportunistic times to invest.

Despite a recent recovery since mid-June, the REA Group share price is down by around 30% from the beginning of 2022.

Of course, it still has a higher price-to-earnings (p/e) ratio than many ASX shares. Profit estimates on CMC Markets put the REA Group share price at 38x FY22’s estimated earnings.

Things may not be as bad as they appear

For starters, I think it’s important to acknowledge that a fall in house prices doesn’t necessarily mean that REA Group earnings will fall.

The company owns the key asset realestate.com.au. It earns money from the number of property listings on the property portal and the advertising price of those listings. The fall in house prices isn’t necessarily a bad thing for REA Group.

It’s hard to say what’s going to happen next. But property sellers may well need to choose the more premium advertising packages to attract more potential buyers in this difficult market. The advertising cost is typically a relatively small amount compared to the selling agent fee and indeed compared to the sale price of the property itself.

How many listings will there be? That’s anyone’s guess. A falling market is a pretty rare occurrence for the Australian property market.

On listings, the latest we’ve heard from REA Group is from its quarterly update’s outlook comments. It said that April national residential listings were down 8% year on year, with Sydney listings declining 19% and Melbourne down 18%. It was impacted by the timing of the Easter and ANZAC Day holiday period.

REA Group said national listings are “likely to be down” year on year in the fourth quarter, reflecting “very strong prior period listings and potential impacts from the federal election”.

According to estimates on CMC, REA Group is expected to grow earnings per share (EPS) by 13% in FY23 and then by a further 16.9%. In FY24, it could generate $4.13 of EPS.

Other reasons why I think the REA Group share price is a buy

Aside from the profit growth and lower share price, I believe there are many attractive features of REA Group.

It has strong network effects. REA Group has the most potential buyers looking at its portal, which then attracts the most sellers, which attracts more buyers and so on. This allows REA Group to increase its prices with little detrimental effect.

The ASX share also has a good balance sheet, as well as a number of investments in property sites that have strong market positions in other countries including the United States, India and South-East Asian countries. Considering the large populations of these places, I think those investments have good long-term potential.

The post Why I think the REA share price is a bargain buy right now appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison 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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