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REA Group Limited (ASX:REA), a internet company based in Australia, saw a double-digit share price rise of over 10% in the past couple of months on the ASX. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Today I will analyse the most recent data on REA Group’s outlook and valuation to see if the opportunity still exists. View our latest analysis for REA Group
Is REA Group still cheap?
REA Group appears to be overvalued by 41% at the moment, based on my discounted cash flow valuation. The stock is currently priced at AU$78.79 on the market compared to my intrinsic value of A$55.74. This means that the buying opportunity has probably disappeared for now. In addition to this, it seems like REA Group’s share price is quite stable, which could mean two things: firstly, it may take the share price a while to fall back down to an attractive buying range, and secondly, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta.
What does the future of REA Group look like?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. REA Group’s earnings over the next few years are expected to double, indicating a very optimistic future ahead. This should lead to stronger cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? REA’s optimistic future growth appears to have been factored into the current share price, with shares trading above its fair value. At this current price, shareholders may be asking a different question – should I sell? If you believe REA should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you’ve been keeping an eye on REA for a while, now may not be the best time to enter into the stock. The price has surpassed its true value, which means there’s no upside from mispricing. However, the positive outlook is encouraging for REA, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.