One of my best investment ideas over the past decade or so has been buying Australia’s leading online advertising stocks during share-price weakness.
This idea mostly referred to three star stocks: REA Group, CAR Group and SEEK. Other online marketplace stocks have come and gone over the years, leaving REA, CAR Group and SEEK to lead their respective markets.
The idea was simple. Buy the best portal stocks during share market pullbacks and corrections when valuations across the market fall. REA, CAR Group and SEEK always look pricey, so watching and waiting for better value makes sense.
In some ways, REA, CAR Group and SEEK have been a form of contrarian investing over the years. I can recall many fund managers and analysts who argued those stocks were massively overvalued. Buying star stocks hardly seems ‘contrarian’, but it can be when a chorus of commentators says it’s time to sell.
For years, the market underestimated the earnings growth of REA, CAR Group and SEEK. Those stocks traded on sky-high Price Earnings (PE) for a reason: fabulous market positions, strong business models and high growth potential.
The extraordinary success over the years of REA, Car Group and, to a lesser extent, SEEK, reinforces a few investment truths.
The first is that relying on simplistic investment metrics, in isolation, is dangerous. A stock on a high PE might be good value if its earnings growth justifies that multiple. Conversely, a stock on a low PE can be poor value if profits disappoint.
The key, as always, is focusing on company quality and value. That is, understanding a company’s market position, business model, earnings growth and execution – and forming a view on whether its valuation adequately reflects that.
REA again starred in this profit-reporting season. FY24 revenue rose 23% to $1.45 billion and net after-tax profit leapt 24% to $461 million. REA described its result as ‘exceptional’ – a claim hard to dispute. Its share price rallied on the news.
Remarkably, national listings growth for Australian property is slightly above the 6-year average (at 7%) despite high interest rates and a gloomy economy. Few things, it seems, can stop buyer-and-seller activity in the housing market.
So, would I buy REA at these levels? No. Would I buy REA on significant share-price weakness (10% or more from its high) during a share market pullback or correction? Probably, although it’s getting harder as REA’s valuation climbs.
Chart 1: REA Group (ASX: REA)
Source: Google Finance
CAR Group, a favourite of this column over the past few years, also delivered another excellent result. Adjusted revenue rose 41% to almost $1.1 billion and reported after-tax net profit of $250 million topped market forecasts.
The market continues to underestimate CAR’ Group’s global growth prospects and ability to roll out a proven platform to large, new markets.
Like REA, I wouldn’t buy CAR Group at current levels after its recent rally. I would, however, wait for better value during a market pullback. Few mid-cap Australian companies have as much long-term growth potential as CAR Group.
Chart 2: CAR Group (ASX: CAR)
Source: Google Finance
From a valuation perspective, SEEK is the more interesting of the three online advertising stocks. Unlike REA and CAR, Seek has disappointed in the past few years, falling from around $34 in late 2021 to $21.25.
Unlike REA and CAR Group, SEEK’s FY24 result slightly disappointed investors. A weaker labour market (and softer job advertisements) after the initial strong jobs bounce back from COVID-19 has weighed on SEEK.
Longer term, rising competition for job ads from LinkedIn and other platforms are other headwinds in a fragmented job advertising market. SEEK doesn’t dominate its market like REA or CAR these days, and job listings are highly cyclical.
At $21.25, SEEK is trading just above fair value, in my view. Over the years, it’s been rare to buy SEEK at anywhere near fair value, meaning the stock deserves a spot on portfolio watchlists in anticipation of continued share-price weakness as Australia’s economy slows, unemployment rises, and job listings fall.
By this time next year, conditions should be improving for SEEK, amid interest-rate cuts, gradually improving consumer confidence and a strengthening job market.
Chart 3: SEEK (ASX: SEK)
Source: Google Finance
Small portal stocks
Outside of REA, CAR Group and Seek, I’ve been trawling through beaten-up smaller online advertising stocks to identify value.
Three caught my attention: Hipages Group Holdings, Airtasker and Frontier Digital Venture. With each due to report its full-year or half-year results, it’s too soon to form a definitive opinion. Frontier, however, looks particularly interesting at its current valuation.
Shares in Hipages, a platform that connects tradespersons and customers, has held up in the last few months, after sharp falls in the past few years. A slowing economy and weak consumer sentiment are tough conditions for tradie firms.
Hipages has a good market position and business model, but it’s hard to see demand for home repairs and renovations rising anytime soon in this economy.
Still, Hipages’ valuation has fallen a long way, meaning a lot of bad news is already priced into its shares. It’s one to watch this profit-reporting season.
Chart 4: Hipages (ASX: HPG
Source: Google Finance
Airtasker shares, too, have tanked in the past few years. The online marketplace, which allows people to outsource everyday tasks, listed on ASX in 2021 at 65 cents. After soaring to almost $1.50 after listing, the shares now trade at 28 cents.
Try as I might, I can’t get excited about task outsourcing platforms. In a slowing economy, more people will do their own tasks rather than pay others. Longer term, I wonder if online task outsourcing was a fad or has substance.
Nevertheless, Airtasker’s valuation is sharply below where it was a few years ago. Due later this month, Airtasker’s result is worth watching.
Chart 5: Airtasker (ASX: ART)
Source: Google Finance
Frontier Digital Ventures, a private equity firm that invests in and develops online property classified businesses in emerging markets, is interesting at 36 cents.
Frontier traded around $1.80 a few years ago as the market rated its potential to become a mini REA in property classified ads in high-growth emerging markets. Australian portals targeting emerging markets in online advertising, such as iCars, were acquired by larger rivals.
Headquartered in Malaysia, Frontier owns or invests in a number of property-adverting portals across Asia, Latin America and parts of Africa. Several of these portals are the leading sites for classified advertisements in their market.
In August 2024, Frontier reported record quarterly revenue of $22.1 million for 2Q 2024, up 15% on the previous corresponding period. Quarterly EBTIDA of $1.8 million rose 10% on the same period last year.
Founder and CEO Shaun Di Gregorio said: “Over the last 18 months, we have successfully navigated the challenges posed by uncertain economic conditions around the globe. As these conditions show signs of improvement, we expect to see improved trading conditions in the medium term.”
The market seems to have forgotten about Frontier, just as it could be turning the corner. Capitalised at $160 million, Frontier suits experienced investors who understand the higher risks of investing in micro-cap tech companies operating in volatile emerging markets.
Chart 6: Frontier Digital Ventures (ASX: FDV)
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 21 August 2024.
