The REA Group Limited (ASX: REA) share price was once again a positive performer during the last financial year.
Despite the housing market downturn, the property listings company's shares finished the period with a gain of approximately 6% excluding dividends.
Is it too late to buy REA Group's shares?
I don't believe it is too late to pick up REA Group's shares, especially given the potential for a housing market rebound in 2020.
If this were to occur, I believe it is likely to lead to strong growth in listings and drive solid profit growth over the next few years.
I'm not alone in believing that REA Group's shares are in the buy zone.
According to a note out of Goldman Sachs, its analysts have retained their buy rating and lifted the price target on the company's shares to $105.00. This implies potential upside of over 9% based on its last close price.
Why does Goldman Sachs like REA Group?
Goldman likes REA Group due to its belief that the company is well-placed to deliver a number of years of strong domestic growth, driven by improved listings and average yields.
And whilst some investors believe that its growth could materially slow as yields reach a ceiling following this period of growth, the broker doesn't agree with this view. This is down to REA Group's vendor leads opportunity, which the broker sees as a potentially significant revenue stream.
The note explains that real estate agents have shown a willingness to pay for vendor leads (or referrals) from third parties, particularly in the US market, and believes this will be the same in Australia.
Goldman said: "From FY20, REA will charge non-Premiere customers A$0-200 per lead, while Premiere-All subscribers will have unlimited free leads for 12 months. From FY21, although yet to be confirmed, we believe REA is planning on also charging Premiere-All customers for these leads."
This has the potential to grow materially in the not so distant future according to the broker.
It said: "For REA, we explicitly forecast A$16mn/A$14mn of Revenue/EBITDA in FY21E (1%/2% of total), but believe this could grow to A$102-154mn of revenue (c.10% of domestic revenue) and A$92-$138mn of EBITDA by FY25E if REA was to generate 10-15% share of listings at a total lead cost equivalent to 20% of commissions. This would still only represent c.2-3% of the agent commission pool, which in our view is achievable given the dominance of REA's platform."
And whilst it also sees opportunities for rival Domain Holdings Australia Ltd (ASX: DHG) to benefit from this revenue stream as well, the broker isn't a buyer of its shares at this stage. It has retained its neutral rating on Domain's shares and lifted its price target to $3.55.
Overall, Goldman believes the future looks bright for REA Group and I completely agree.
