One of my investment ideas for The Bull this decade was to buy the big online marketplace stocks on price dips. Patient value investors who bought Seek, REA Group and during bouts of sharemarket weakness have prospered. These companies reinforce the dangers of relying on simplistic valuation metrics, such as price-earnings (PE) multiples. Seek and REA’s high PE ratios turned off investors who did not realise the strength of the business model and growth prospects justified the valuation. 
Seek, REA and also reminded investors that companies that dominate online segments have years of growth. Challengers struggle to take on top internet portals because of network effects: more users attract more advertisers, which attracts more users. That creates formidable barriers to entry.
Carsales, the smallest of the big three internet portal stocks, does not have the market profile of Seek or REA but has excellent long-term prospects as its expands its international footprint and benefits from higher car turnover. 
Carsales exemplifies the benefits of buying the top internet portal stocks on price weakness. The stock fell from a 52-week high of $13.63 in October 2016 to $9.57 a month later. A sell-off in technology stocks in the fourth quarter and Carsale’s disappointing trading update in August spooked the market. Headwinds in the Stratton finance operation were the main concerns.
The market over-reaction created an opportunity. Carsales has rallied to $13.37 this year on the back on a solid FY17 result released this week. The stock was up almost 5 per cent after the news and is testing its 52-week high. Chartist will watch if Carsales breaks price resistance.
Carsales reported 8 per cent growth in revenue to $372.1 million for FY17 and 4 per cent growth in underlying earnings to $119.1 million – a touch better than market expectation. 
Strength in Carsales’ international business stood out. International revenue, small in Carsales’ overall sales, almost doubled to $8.3 million in FY17. Still, the company’s long-term investment in emerging markets is starting to pay off and has excellent growth prospects. 
Carsales’ 49.9 per cent owned SK Encar business in Asia grew revenue by 32 per cent. SK Encar is South Korea’s largest automotive trading site. 
Webmotors Financials, 30 per cent owned by Carsales, delivered 8 per cent earnings growth. Having suffered from Brazil’s weak economy, Webmotors’ performance is pleasing. Carsales expanded its Latin America exposure by acquiring Demotores Argentina Financials in August 2017. Investments in Mexico and Chile round out its regional presence.
The company’s Asia footprint is expanding through investments in SK Encar, Red Book and iCar Asia, which has car portals across South-East Asia. Although some of these operations are early stage, they give Carsales a valuable presence in giant emerging markets. 
With another 3 billion emerging-market consumers expected to join the middle-class by 2030, on OECD forecasts, automotive demand and turnover must rise. Higher internet penetration and greater use of online marketplaces in emerging countries is another positive. 
The market, understandably, is more interested in Carsales’ domestic operations. Management said the December half started well and it expects revenue and earnings growth to remain “solid”. 
The stabilisation of the Stratton finance business, after a disrupted 18 months due to issues with a major lender, is a good sign. The finance division contributed about 15 per cent of Carsales’ revenue and Stratton is the largest part within it. Stratton should return to growth in FY18.
The display advertising and data/research/services divisions are performing nicely. Growth in the car dealer and private-user divisions appears to be slowing but should pick up in FY18. All up, there were no alarm bells in the domestic performance and better signs ahead.
A share price target of $12.80 from a consensus of 14 broking firms suggests Carsales is a touch overvalued. I suspect that target will lift as brokers update earnings forecasts after Carsales’ latest result and feed them into valuation models.
Macquarie’s 12-month price target is $14 and Morningstar values the stock at $13. Macquarie’s estimate suggests Carsales’ rally has a little further to run.
Technical analysis is particularly useful in these situations to understand the market’s view. If Carsales convincingly breaks through $13.60 it will be in new territory on its chart and a good chance of extending the rally. If the stock faces resistance, it would seek support around $12.
My view? Carsales’ FY17 result impressed, but not by enough to justify a major re-rating. Much of the gains were already baked into the price in the months before the result. 
It would not surprise if Carsales gave back some of its recent gains as more brokers issue hold recommendations or suggest clients take some profits. 
If that happens, Carsales will provide another opportunity for investors to buy in at lower prices in the lead-up to its AGM and trading update later this year – an event that should confirm the company’s positive trajectory in FY18.
Chart 1: Carsales.comSource: The Bull

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• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article, consider its appropriateness regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at August 10, 2017.