Not even a property price crash can stop this company

The stock is off about 3%, which is probably not a bad outcome, given the environment is deteriorating. But what I'd say is that stock prices do tend to be quite volatile when results are announced because it takes some time for investors to digest information. What's more important is how the stock reacts over the coming weeks, as investors make decisions.

The main driver of when a stock reacts to an announcement is expectations versus what's reported. And actually, expectations had started to decline going into the result. And the result itself actually slightly beat. So today's share price move is neither here nor there. If I had to pick one, I'd say it's a bit of an overreaction. 

It's actually a really strong result. And if people think this is a tough result, wait till they see what's ahead.

And then the other thing to watch, and I think this was a positive surprise, was the losses in India are starting to peak. And typically, as investors, we get quite nervous when companies expand to new growth markets, particularly emerging markets because they are tough. And they've built a business that's now number one in India and they're saying losses are about to peak. If they can hold onto that leadership and show a pathway to profitability, that could be a hidden growth option for shareholders. 

REA has walked away from its guidance for the Australian business, saying that its forecast revenue growth may not exceed cost growth. But that's understandable. So some investors would say that was a negative surprise. But given the environment, I would say it's understandable and not a huge negative. And the fact that the stock hasn't reacted so negatively to that tells you the market had expected them to walk away from that guidance.

The stock isn't incredibly cheap, but it's a very high-quality company. We own it in the portfolio. 

For us, it's a buy because we think this level of pricing power is very difficult to find on the ASX. And there are some hidden growth opportunities. 

It is still early days, but as I talked about earlier, India is a potential blue-sky option. And they are talking about realising their 20% interest in the move, which could provide capital for management to return back to shareholders.

The outlook is definitely getting more difficult, particularly on the volume side. And over the short term, there's definitely a cyclical risk that listings deteriorate further. But when we look at the listing volumes, they are at pretty low levels compared to history. And at some point, vendors will have to come to the market and adjust to the lower pricing environment. 

When you look at what drives listings, it's either downsizing, death, divorce, or investor churn. Churn in the market has typically been about 4-5%, and is currently a lot lower than that. So we think listings will come back.

The risk for REA really, in our view, is regulatory risk. Because it's got such a strong dominant position, they are exercising pricing power, squeezing agents indirectly, and agents have to pass this on to the customers. The risk is that there is some regulatory interjection here by governments. And what could happen here is that - and they did this a couple of years ago - when they changed the way real estate agents could advertise auction reserve guides. And the risk is that the business is regulated and its pricing power is curtailed. But that's a very left-tail risk. We'd say that it's unlikely because you do have a strong number two player, Domain. And so as long as that player exists, it's not going to get treated like a monopoly business.

The fixed-rate mortgage cliff could actually be positive for REA as there would be more listings hitting the market. Right now, everyone is in the "wait and see" phase, trying to ride this period of weakness out. Those who acquired property at the market peak 12 months ago may say, "Look, I can't make my repayments, so let's list the property." That would actually be positive for REA.

I'd say the market is probably between three and four, only because earnings expectations are still high. And so when you actually factor in lower earnings expectations, you are paying a slightly higher multiple for the market. Where I'd say there is a lot of value are sectors such as energy, insurance and commodities. And where I'd say there's not a lot of value are tech, healthcare and even defensives, such as staples. So it is a bifurcated market. It's not overwhelmingly cheap, but you can still make money.