4 high-flying online advertising stocks

Photo of Nick Radge By Nick Radge

min read

What the share-price charts say about REA, Seek, Carsales and Webjet.

Investors who bought leading online advertising companies – the likes of REA Group, Seek, Carsales.com and Webjet – have enjoyed stellar gains this decade.

Here is an overview of the so-called ‘internet portal’ stocks using technical analysis (charting).

(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article.)

1. REA Group

Source: Premium Data

REA is the market leader in Australian online real estate advertising via websites and mobile applications. Its major force in the domestic market is realestate.com.au, which accounts for 94 per cent of property listings nationwide.

The company recently reported top-line revenue growth of 20 per cent and 16 per cent growth in net profit after tax, which was aligned to analyst expectations. What was not expected was management’s slightly dovish commentary about domestic growth in FY17. The market’s concern is that 88 per cent of the group’s revenue is generated in Australia so shares were marked down from a recent high of $65 to $54.

However, the technical outlook for REA remains bullish in the longer term and this near-term weakness is a typical retracement within a healthy bullish trend. The minor trend line support extending from early 2015 should be breached, which will enable a deeper dip back toward the strong support zone labelled A.

This zone stands at the $50–52 area and should encourage buyer demand. There is scope for a little more downside but below $48 is unlikely. Once this decline has completed we would anticipate new highs.

2. Seek 

Source: Premium Data

Seek’s online employment business operates in 12 countries, including Australia, New Zealand and Hong Kong. It functions in three business divisions: online employment classified advertising, running and executing training courses, and investments in overseas online employment marketplaces.

Domestically, Seek holds 33 per cent market share and its international businesses, consisting of Seek Asia, Zhaopin, Brasil Online and OCC, are all expected to continue to drive growth over the next decade.

Recent FY16 results were in line with analysts’ expectations but the company is facing some challenges; Asian markets are difficult and renewed growth will be required to justify investment in acquiring assets. Also, the future of Zhaopin is still unsure as management reviews options following a buyout proposal from private equity and key management.

The chart clearly shows the cautious stance taken by the market over the past few years, with prices tracking sideways. Within the multi-year pattern from the 2009 lows, this is quite acceptable, albeit frustrating for longer-term investors. But it does portend a new trend higher once the confidence returns on the company’s near-term challenges.

There is strong support at the lower end of the range at $12 and buyer demand is seen on excursions down to these levels. Ideally, the stock will dip toward that level once more before starting its multi-year trend higher again.

Any stiff collapse below that zone of support would be a red flag, but patience should be rewarded with new highs in late 2017.

3. Carsales.com 

Source: Premium Data

The Carsales network is an online destination for buying and selling cars, motorbikes, trucks, boats, caravans and machinery equipment. The company provides online advertising, data and research products, including software, research and reporting as well as website development and hosting.

Recent revenue growth in its international business increased by 54 per cent but total contribution was less than 5 per cent. Although domestic online advertising revenue growth has been stagnating, there was a solid pick-up in the second half, which enabled FY16 growth of 11 per cent. The key component to further growth will be how the company leverages its international businesses.

The chart shows a significant trend starting mid-2011 followed by a large coiling pattern. These patterns tend to indicate a brief continuation of the trend that was evident here and helped along with a positive jump after reporting.

Unfortunately, that positive drift was not sustainable and prices quickly fell back to a minor line of support about $12. This area saw significant buyer demand in early August, which is a positive. However, what is cause for concern is that the decline has been quite sharp.

Usually a sharp decline is indicative of a major reversal of trend or the first leg of a long sideways consolidation phase. The outcome will be determined by whether or not those same buyers from August appear again at the support zone. One way or another, technically Carsales.com does not appear to be going anywhere too fast.

4. Webjet

Source: Premium Data

The recent partnership with Thomas Cook and being included in the ASX 200 Index has seen shares in this online travel booking business continue their impressive run.

Webjet is an industry-leading digital travel business providing services to the regional consumer market as well as global wholesale markets. It operates in two segments: business-to-consumer and business-to-business. Business-to-consumer operations are via Webjet, ZUJI and Online Republic, which was acquired in May this year.

Its business-to-business travel operations sell hotel rooms to travel agent partners via its brands Lots of Hotels and SunHotels. The latter operations’ opportunity is significant and is becoming increasingly attractive as scale is built.

If one is a pure momentum player, this chart really says it all; hop on the ride and just go with it. Technically, it is difficult to analyse without the normal pattern progression and it is highly unusual to have such a strong trend take shape without any pause.

The parabolic nature of the rise is of concern and is deemed unsustainable. However, that said, there is no evidence on lower timeframes of any type of exhaustion.

What is not shown on this chart is the academically well-documented anomaly known as “post-earnings announcement drift” – the tendency for the share price to drift in the direction of the earnings surprise for several weeks and even months following the announcement. In this case, Webjet jumped 20 per cent on the day and has continued to rise since.

About the author

Nick Radge @thechartist is Head of Trading and Research at The Chartist www.thechartist.com.au. He and The Chartist team provide trading portfolios and technical research for serious investors and Nick records a daily On The Charts podcast on up-to-date opportunities.

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