Trade Me Group Ltd plunges: Is it a buy?

In the past three months, Trade Me Group Ltd's (ASX:TME) share price has dropped 16.5%. Is it time to buy?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In the past three months, the share price of Trade Me Group Ltd (ASX: TME) has plummeted 16.5%. As a long-term value investor this can be a great opportunity to pick up a value stock at a low price.

Trade Me is the leading online marketplace and classifieds business in New Zealand with a highly engaged community of close to 2.8 million members. It has a diverse and comprehensive range of listings, with listings across new and used goods, automotive, employment, real estate, accommodation, dating and group buying.

Revenues and net profits

According to TME's annual reports (below), since its listing in December 2011 its revenues have grown by 12.92% per annum from $125 million in 2011 to $180 million in 2014. At the same time however, its net profits have grown by just 5% per annum from $69 million to $80 million.

Amounts in Millions 2011 2012 2013 2014
Revenue 125 142 164 180
Net Profit 69 75 78 80

Source: Annual Reports

A quick look at Trade Me's 2015 half-year report, released in February, shows that this trend has continued in 2015 with revenue up 13% YoY to $96.9 million, but net profit after tax is up just 1.1% to $38.4 Million.

In the same report we find an explanation as to why this increase in revenues is not being reflected in bottom line profits.

CEO Jon Macdonald said, "Expenses were up 28 per cent year-on-year. This ramp-up in costs was reflected in net profit after tax of 38.4m, up 1.1 per cent year-on-year. We're continuing to invest in people, product development and marketing, as well as ramping up our sales and account management capability. We are convinced this is the right approach and believe that investment now will result in stronger market position and greater growth opportunities for Trade Me in the future."

Cash flows

As shown in the table below, from its listing in December 2011, Trade Me's 'cash flows after investing' are around $171.9 million. When you take into account the $127 distributed as dividends and $15.5 million in 'other financing cash flows' we can see that Trade Me has a 'funding surplus' totalling $29.3 million. This is a good sign for the company.

Amounts in Millions 2011 2012 2013 2014 Total
Cash flow from operations 67 56 80 100 303
Cash flow from investing 65 21 10 33 129
CF after investing 1.9 35 69 66 171.9
Dividends (6) (55) (66) 127
Other Financing CF (2.9) (5.9) (6.7) 15.5
Funding Surplus 1.9 25.9 8.2 (6.7) 29.3

Source: Annual Reports

Balance sheet

If we have a look at Trade Me's balance sheet we can see, cash has increased from $4 million to $38 million, equity has increased from $593 million to $625 million, but most importantly debt has grown significantly from $0 to $153 million in 2014. Its debt to equity is still manageable at 18%, and return on equity (ROE) is good at around 12%.

Amounts in Millions 2011 2012 2013 2014
Cash 4 30 41 38
Debt 0 129 139 153
Equity 593 500 554 625

Source: Annual Reports

Competitive Advantage

As New Zealand's largest online auction site, Trade Me's competitive advantage comes from its 'network effect'.

The network effect is the effect that one's use of a good or service has on its value to other users. Lists tend to have a positive feedback loop – the more users a site attracts; the more others will want to use it. The more customers view the site, the more suppliers want to list their products. The more products listed by suppliers, the more customers view the site and so on.

Other companies that enjoy the same benefits of the network effect include REA Group Limited (ASX:REA), Seek Limited (ASX:SEK), and Carsales.Com Ltd (ASX:CAR).

Verdict

For me, there's a lot to like about Trade Me. It has a strong brand awareness and network effect. It has a strategy of developing complementary offerings within its portfolio. The company has made a number of acquisitions including Harmoney Limited, MotorWeb, LifeDirect, Holiday Homes, and Paystation.

It has strong growth in revenues and cash flows, but its net profits continue to remain flat. Trade Me's margins in the near term could come under pressure as it seeks to invest in other businesses to drive top line growth. Thin margins leave the company vulnerable to a slowdown or economic downturn in New Zealand.

Lastly, New Zealand is a country of just 4.5 million people, the question I keep asking myself is, "How much potential growth is there for Trade Me in the New Zealand market"?

In terms of investment, for the moment I'll be sitting on the side-lines and keeping Trade Me on my watchlist.

Motley Fool contributor John Hopkins has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »