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Why the REA Group share price is crashing today

Brendon Lau
Man in suit screaming

The REA Group Limited (ASX: REA) share price is taking a beating with the stock tumbling even as the broader market rallies.

The REA share price tumbled more 1.6% to $101.25 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped 0.6%.

The weakness in Australia’s largest property website operator comes despite further signs on the weekend that the housing market in two of our largest cities is rebounding. Experts are even predicting that house prices will push to record highs over the coming months.

Rival makes acquisition as REA stumbles on downgrade

The falling REA Group also stands in contrast to the 3.9% surge in rival Domain Holdings Australia Ltd’s (ASX: DHG) share price to $3.24 after it announced a $35 million deal to acquire point of sales platform Real Time Agent.

The underperformance of REA isn’t helped by Credit Suisse, which downgraded the stock to “underperform” from “neutral” today.

Its decision to cut its rating on the stock follows the group’s disappointing first quarter results. Weakness in residential listing volumes triggered a 9% drop in revenue and a 16% slump in earnings before interest, tax, depreciation and amortisation (EBITDA) for the quarter.

Earnings miss

This was below the broker’s prior estimates for 1% lift in revenue and 2% for the EBITDA line.

“Our updated forecasts take into account the listings weakness (CSe now for 1H20 revenue decline of 6%) and while we agree that there will be a recovery in 2H (CSe for 13% revenue growth), we find current valuation levels difficult to justify,” said the broker.

“After taking into account our updated numbers, the stock is trading at over 40x 12-month forward PE, above the top end of it historical trading range.

“In our view, the market is more than factoring in a recovery in earnings and the risk from this point is to the downside.”

Premium listings losing appeal

There are also questions emerging about growth of its premium listings. REA’s share price survived the downturn in residential market last year as property agents and developers used these premium listings to offset the slowdown. This protected REA’s bottom line.

But there are signs that growth in its premium listings is flatlining. The silver lining is that Credit Suisse doesn’t think the slowing growth is a structural issue.

“We are of the view this can be explained by mix shift and group revenue growth being impacted by slowing developer volumes,” said the broker.

“And while we don’t think this is a structural factor, lower developer volumes are likely to remain a headwind in the near to medium term.”

Credit Suisse’s price target on REA is $90 a share.

The post Why the REA Group share price is crashing today appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019