Is Realestate.com.au an "Intelligent Investment"

There are a heap of investment newsletters about the place, particularly with the sharemarket going beserk. The one I really respect is "The Intelligent Investor" (www.intelligentinvestor.com.au). For those interested in investment, it is based on the Benjamin Graham/Warren Buffett school of value investing.

Anyhow, the latest edition featured a story on realestate.com.au (ASX code: REA) and whether it has merit as a value investment. As it's a subscription newsletter I can't give you a direct link to the story and I'm not going to reproduce the article here (although I think you can get a free trial from their website). The crux, though, is that at the current price they think all of the upside has been built into the share price already, and that the downside risk is huge.This got me thinking - what is the upside of REA?

The company pretty much owns the local real estate classified market at present. However, Fairfax's Domain is doing some really interesting things and in some areas has taken a slight lead (such as deploying recent sale data on a street map). Packer's PBL is now joining the fray with myhome.com.au - slightly delayed and an unknown quantity, but I note another major PBL investment - Seek - is already running ads for the upcoming site. So the local market is heating up, although REA is a great player and has to date been unassailable. Certainly, today, it is the player in this space I'd most like to own.

Locally, the most exciting aspect of the market is that so little of it is currently online, but everyone knows this is THE future of classifieds. Overseas REA is also doing some exciting things, but time will tell how these come off. The market generally loves the acquisitions, but the market loves anything online at the moment. Bring back memories?

The challenge question for The Intelligent Investor was the potential upside of REA. And in truth, I'm not convinced anyone has a good answer for this. Realestate.com.au is a great brand, but possibly not as strong as Seek in the employment space (and less profitable than Seek). I agree with the The Intelligent Investor that there is lots of downside risk to REA and that they can't afford to slip up. But as for the upside...online classifieds in all categories is a great story. Obviously I'm not providing any of this as investment advice, but I'd still rather own REA than any other listed internet play - except perhaps for Seek.

One thing I'd certainly do, though, is take a good look at the market again in 3 and 6 months.