In the wake of phenomenal share price increases, retailers such as Wotif and Webjet, and the online classifieds providers such as Seek, Carsales.com and realestate.com.au owner REA have grown enormously with most having market caps in the billions. They are also very expensive. Their average PE is about 20 times — a fair whack above the industrial average of 13 times.
The share prices of the online companies are “priced to perfection”, and could easily face a massive drop if there is an earnings hiccup and they don’t keep producing 20 per cent-plus annual growth. They would face a double whammy of lower expected earnings and a PE de-rating to something in the order of 15 times, or lower.