REA - A Straw Hats Buy, page-23

"I agree that REA's valuation is probably a bit rich considering the state of the property market and rising rates although I expect quite a bit has been priced in considering its decline. The only reason being as a long term investor I was happy to have the stock grow into its valuation at around $110 rather than missing the opportunity at those prices as I won't pretend that I know where the markets are going."

Agree and like your pragmatic view.

REA needs to be valued not on the prevailing state of the property market at any given time (because if one followed that philosophy one would be buying the stock 12 months ago when the property market was absolutely booming... and when the share price was, commensurately, 40% higher than it is today), but on a view of the remaining growth runway of the business.

If one has a view that REA has the sort of business model that will continue to support organic earnings growth at a rate in the low- to mid-teens for several years to come, then that growth will quickly chew into the current 25x EV/EBITDA multiple (assuming FY2023's EBITDA will be flat on FY2022.... for context, Q1 was up 7% on pcp).

In just 3 years the prospective EV/EBITDA multiple would be at ~15x (and I strongly doubt the market will ever ascribe that modest a multiple to this pre-eminent business).

I'd say that leaves the stock fairly valued; certainly not noticeably overvalued given the world-class quality of REA's various brands and their market-leading positions.

Not overvalued but at the same time not the stuff of basement bargains. But then again, it is very rare that REA gets priced priced at anything resembling bargain levels (back in June he stock got down to <20x EB/EBITDA; but that was just for a fleeting moment of a day or two).

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