Rightmove (RMV): Curiously Undervalued
Current price: 4,028.47 (GBX)
Target: 4,346.00 (GBX)
Key statistics
P/E Ratio: 27.53
EPS: 1.46
52 -week range: 3,638.00 - 4,374.00
Market capitalisation: 3.677B
Shares outstanding: 91.46m
1 year return: 8.58%
Dividend: 1.34%
Price History:
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Twas the month before Christmas and despite all the shocks, Sam and his team were searching for stocks. Valuations were high, investors took care, looking for signs that bull would turn bear.
It’s November, and the weather is almost as miserable as the years continued stock market rally. Analysts across the asset classes have been treading on eggshells with overly cautious recommendations. The market looks expensive, but it’s still packed with high quality stocks markedly undervalued given their fundamentals. They are victim to irrational pessimism exercised by banks irreparably scarred by recent memory.
Rightmove, the UK’s largest online property portal, is a classic example. It’s price has jittered through the year falling from its all time high of 4,346.00GBX in May to 4028.00GBX today. The price of Rightmove, and its primary competitor ZPG, sway seemingly in the face of the release of gloomy property market forecasts issued post Brexit.
Such movements are emotional more than reflective of a change in fundamentals. To be sure, the property market is slowing; house price growth decelerated and the number of transactions fell. However, Rightmove’s fundamentals are not directly exposed to moderate vicissitudes of the housing market. Rightmove’s revenues accrue from the flat fees it charges estate agents to list properties on the site. In 2017, it successfully increased the average monthly fee paid by 10% to £911 per month. The number of estate agents using the site also increased. Combined, this drove a healthy 10.8% increase in revenues and 10% increase in annual profits.
Expect Rightmove’s strong revenue growth to continue despite growing signs of discontent in Britain’s housing market. 76% of house hunters used Rightmove this year generating over 21m property searches. The cost of not being on Rightmove’s platform for agencies is huge. Creaks in the housing market might even spike a bidding war for advertising space driving Rightmove’s revenues per agency higher still. The monthly fee remains cheap compared to the more traditional ink based methods once employed to advertise property, room still exists for Rightmove to exercise its pricing power.
Rightmove is well placed to continue organic growth. It will continue to capitalise off powerful network effects and its value will be driven by users who continue to flock to the site. The scope for new entrants to join Rightmove looks bleak. Even Google was pushed from the market, forced to withdraw “Google Maps Property Search worldwide” in 2010. Despite its dominance, Rightmove doesn’t rest on its laurels. In 2017, it came first in Forbes Magazine’s annual ranking of innovative growth companies for a second time running.
To be sure, risks still exist for Rightmove. A major correction in the housing market could put the marketing budgets of agencies under pressure. In such a scenario, Rightmove’s lower cost rival ZPG could become the platform of choice with the effect of slowly unraveling the first mover advantages Rightmove built up since 2000. This would also force a greater degree of price competition in the duopoly. More cooperation from agencies might also present a challenge to Rightmove’s pricing power. Major estate agents including Knight Frank and Savills have tried to usurp the platform before through the launch of Onthemarket, a wildly unpopular property website. In our view, a successful challenge to Rightmove remains distant.
Given the increasing health in fundamentals, relatively cheap P/E ratio and scope for long run growth, Rightmove certainly deserves its “Outperform” rating. We expect that continued strong annual results and the realisation that Rightmove can prosper despite stutters in the housing market will cause upward valuations of this stock soon in the new year.
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