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Current as of 26/05/17 07:40PM NZST
The Business Herald’s markets and banking reporter.

Stock Takes: Is Trade Me's dominance over?

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Facebook's new Marketplace section could be threatening Trade Me's market dominance.
Facebook's new Marketplace section could be threatening Trade Me's market dominance.

Twenty years is a long time in the technology world.

Back in the mid-1990s the internet was in its infancy and we had little idea that by 2016 we'd be carrying devices in our pockets more powerful than the computers that took astronauts to the moon.

Deciding which tech companies operating today might survive the next two decades of innovation and disruption requires a lot of crystal ball gazing.

But Morningstar is questioning whether local auction and online classifieds giant Trade Me can retain its market-leading position over the next 20 years.

In a note published this month, the research house downgraded Trade Me's "economic moat" rating - essentially a measure of a company's ability to stay competitive in the long-term - from wide to narrow.

Morningstar analyst Gareth James said the company had a leading position in New Zealand's online classified advertising market but faced strong competition from Aussie competitors Seek and REA Group.

He said those companies were able to benefit from more "narrowly focused" research and development budgets.

"In addition, much larger global competitors, such as Amazon.com and eBay.com, pose similar but longer-term competitive threats," James said.

"The narrow, rather than wide, economic moat rating also reflects the rapid pace of innovation in the internet sector and our lack of confidence that Trade Me's competitive advantage will endure the next 20 years."

Facebook's arrival

The note doesn't mention what's arguably the NZX-listed company's most pressing competitive challenge - the arrival of Facebook's Marketplace service, which officially launched in New Zealand last week.

Like Trade Me, it offers a platform for buying and selling goods.

Crucially, Facebook's service is free, while sellers are charged a fee on successful Trade Me sales.

Low risk

Craigs Investment Partners says Facebook Marketplace shouldn't be underestimated, but its user experience will need to improve before it becomes a real threat to Trade Me.

A note penned by Craigs analysts Stephen Ridgewell and Joshua Dale lists the areas in which Marketplace falls short of its Kiwi competitor, including a lack of buyer/seller ratings and no disputes resolution process or payment and delivery functions.

"We estimate that at most 15 per cent of [Trade Me's] total revenue derives from used goods sales and is therefore at potential risk from FB Marketplace, and the real figure is likely much less unless FB's model changes materially," the note said.

"Our review of available data suggests take up [of Facebook Marketplace] to date in NZ has been limited, with total listings on a sample of large 'buy and sell' groups falling since March even though membership has increased, suggesting falling user engagement."

However, one regular Trade Me user who sold a Game of Thrones box set through Facebook this week reported that the user experience was fine.

"What do you expect?" he asked. "It's free."

Craigs has left its earnings estimates for Trade Me unchanged, and maintained a "hold" rating on the stock, although its 12-month price target has been cut back slightly from $5.03 to $5.01.

Morningstar reckons the shares are overvalued has a "sell" rating on them.

"We expect the price/fair value premium to erode as financial results fail to meet expectations."

Trade Me shares, which recently traded at $5.28, have fallen away from the record close of $5.86 they reached in September but remain up 26 per cent in the year to date.

Building momentum

Trade Me chief executive Jon Macdonald remains bullish about the firm's prospects, as you'd expect.

The company takes all competition seriously, he says, and can't afford to be complacent.

"Our investment phase is reaching completion and Trade Me is building momentum - which means that we're as well placed as ever to defend against competitors and new entrants," Macdonald said.

He said the company was "better placed than ever to capitalise on the opportunities in front of us".

Trade Me reported a 6.5 per cent decline in net profit, to $74.9 million, for the year to June 30.

- NZ Herald

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The Business Herald’s markets and banking reporter.

A business journalist for more than four years, he also writes the weekly Stock Takes column.Christopher’s main focus is the local sharemarket and issues facing Kiwi investors. He covered manufacturing and retail in his previous Herald role and maintains a special interest in New Zealand’s growing trade relationship with China.

Read more by Christopher Adams

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