"Possibly the highest-quality business on the ASX" - IML's Lucas Goode backs REA

REA Group (ASX: REA) delivered another strong set of results, growing residential revenue by 12% despite flat listings, expanding margins, and guiding to another year of double-digit yield growth. Investors liked what they saw, sending the stock up around 4% by lunchtime.

But not everyone's convinced. Just days before the result, Bell Potter slapped a Sell rating on the stock, arguing investors are underestimating the impact a weaker housing market could have on FY27 listings and earnings.

The divide highlights the key question facing investors: is REA's premium valuation still justified, or is the market becoming too complacent?

Few investors have followed that debate as closely as IML Portfolio Manager Lucas Goode. Having covered REA for around 15 years across both the sell side and buy side, he's watched the company navigate multiple property cycles, interest-rate regimes and competitive threats.

"It's possibly the highest-quality business on the ASX," Goode says.

We spoke to him about REA's latest results, the Bell Potter bear case, whether investors are too focused on housing listings, and why he remains bullish on the stock 

REA Group's FY26 Results

• Revenue rose 7% to $1.79bn, broadly in line with expectations.
• Core EBITDA (excluding associates) increased 12% to $1.09bn, beating consensus by 3%.
• Core NPAT climbed 15% to $650.5m, a 2% beat versus expectations.
• Final fully franked dividend of $1.73 per share took the full-year payout to $2.97, up 20% and slightly ahead of forecasts. 
• Australian residential revenue grew 12%, driven by 13% Buy yield growth despite flat listings, outperforming expectations for a 1-3% decline in listings.
• FY27 guidance: New Buy listings are expected to be flat to down low single digits, with July listings down 2% and Sydney/Melbourne listings down 16%.
• FY27 yield growth is expected to be low double digits, supported by an 8% Premiere+ price increase, while operating costs (excluding M&A) are forecast to rise mid single digits.

What was your biggest takeaway from REA's result?

My biggest takeaway is just what a high-quality business REA is. The share price gets buffeted around by concerns about the housing market, but the way the business is run doesn't change one iota.

The most impressive aspect of the result was REA's cost control and ability to deliver operating leverage even in an uncertain listings environment.

The market wanted more certainty around listings, but the reality is nobody knows where they'll end up - not us, and not even management. What REA can control is the value it delivers to customers, and management again guided to double-digit yield growth.

Listings will do what they do, but the long-term earnings power of REA isn't driven by next year's listings. It's driven by the value the company extracts from every listing.

Residential revenue grew 12% despite flat listings. Does this show REA still has exceptional pricing power, or are we approaching the limits of what it can charge?

It absolutely shows REA still has exceptional pricing power. In fact, I don't think they're approaching the limits at all.

The network effects for REA are stronger than any other business listed on the ASX. You simply can't sell a property effectively in Australia without being on realestate.com.au.

People focus on the price per listing, but what REA is really selling is buyer enquiries. Buyer enquiries were up around 10% this year, while Buy yield increased 13%, meaning the price per lead only increased by around 3%.

Advertising also represents a smaller percentage of the total transaction value today than it did 20 years ago when newspaper advertising dominated. Yet REA delivers far better outcomes than newspapers ever could.

There's still plenty of pricing power left.

Bell Potter continues to rate REA a Sell, arguing FY27 listings could fall by 10%. Is the market becoming too pessimistic?

Nobody really knows where listings will end up. Bell Potter is entitled to its view, just as we are, and even management doesn't know exactly what the housing market will do.

I've followed REA for around 15 years across both the sell side and buy side, and historically concerns around the housing market are actually when you want to buy the stock. That's because listings always recover.

The recent sell-off has been driven by concerns around housing, on top of earlier fears around AI disruption. We don't think either of those fundamentally changes the long-term value of the business.

Even during the Royal Commission, when banks effectively stopped lending, listings only fell by around 11%. If listings did fall 10% again, the share price might weaken further - but I'd actually see that as an even better buying opportunity because REA's competitive position hasn't changed.

REA highlighted several new AI tools. What's your take on what REA is doing with AI, and will it add to their advantage?

Whether AI becomes a meaningful competitive advantage remains to be seen, but I think the existing REA platform is already close to perfect for consumers searching for property.

Because REA has the majority of the audience, the majority of the traffic and all of the listings, it's the best place to deploy AI tools. They can certainly enhance the experience, but I think it's too early to say they'll fundamentally change the business.

Management also noted that less than half a percent of traffic is currently coming from large language models, and that number hasn't really been increasing. Property search is different because consumers ultimately need access to REA's listings, and REA owns that content.

When my real estate agent told me it would cost around $4,000 to list my townhouse on realestate.com.au, I nearly fainted. Is there a genuine disruption risk that a global player like Zillow - or another deep-pocketed competitor - tries to eat REA's lunch?

I think the risk is pretty low.

REA operates a classic two-sided marketplace. Vendors need to be where the buyers are, and buyers want to be where the properties are. That network effect is incredibly difficult to replicate.

The vendor-paid model also helps. Agents may push back on higher prices, but ultimately they're not paying the bill. When you look at the advertising cost as a percentage of the total property transaction, it's actually very small, and all it takes is one extra buyer to more than justify the expense.

We've also seen how difficult it is to challenge dominant property portals. CoStar entered Australia by buying Domain rather than trying to build a competitor from scratch. Overseas, Homes.com has spent heavily trying to challenge Zillow and Realtor with limited success. 

It's incredibly difficult to dislodge a dominant classifieds business once those network effects are established.

REA lifted its final dividend by 25%, completed a $200 million buyback and still has a sizeable cash balance. What did you make of management's capital allocation?

We always like seeing higher dividends, but the buyback was particularly encouraging.

It sends a strong signal about how cash-generative the business is, how strong the balance sheet remains and, importantly, that management believes the shares are undervalued.

Because the buyback is being funded from net cash, it's also accretive for shareholders.

Looking further ahead, I also think REA has interesting M&A opportunities. CEO Cam McIntyre was asked several questions about acquisitions on the results call and understandably wasn't committing to anything.

But it's worth remembering he built an excellent track record for offshore acquisitions during his time as CEO of Carsales. Given REA has held up better than many of its global peers, I think international M&A is something the company could - and should - be looking at seriously.

That said, there's no pressing need to do a deal. The organic growth runway remains exceptionally strong, and I think the business can continue to deliver attractive growth for at least the next five to ten years. 

Would you buy, hold or sell REA today?

Rating: BUY

It's a buy for us.

We think REA is possibly the highest-quality business on the ASX, with plenty of organic growth still ahead of it. 

Concerns around the housing market are actually when you want to buy the stock, not when you want to sell it.

The long-term investment case remains intact, and the recent weakness has simply created a more attractive entry point.