Advertisement

Shares in focus: The Google of Britain's housing boom

Property website Rightmove has enjoyed tremendous success, says Phil Oakley. But can it deliver for shareholders?

Property website Rightmove has done well.Phil Oakley asks whether it can keep on delivering for shareholders.

Online property portal Rightmove has been a stunning success story. It has truly changed the way people look for somewhere to live at a time when other internet ventures promised, but failed to revolutionise markets.

Advertisement - Article continues below

Rightmove.co.uk, founded in 2000 at the height of the boom, has become the Google of the online property market. It has been so successful that it now ranks as one of the most popular websites in the country behind a handful of others, such as Facebook, eBay and Google itself.

Its success has brought with it impressive profit growth and fantastic returns for shareholders. The business now has a stock-market valuation of £2.5bn. Its shares are very highly valued by the market, which implies that the company's profits will continue their stellar rise in the years ahead. The question is, can it keep on delivering or is this as good at it gets?

How the business has fared

The company's success is down to its technology, marketing and branding, which have made it very tough to compete with. It need make no heavy investment in assets, which has allowed it to make huge amounts of money.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

A profit margin of 73% virtually unheard of in most businesses allows Rightmove to generate bucketloads of surplus cash to pay out to shareholders.

The company has proven very flexible in response to a changing property market. During the gloom and doom of a few years ago, when many of its estate-agency customers went out of business, it was still able to cut its costs and increase profit margins.

There's no doubt Rightmove has done a good job for its customers. Its site can generate many more potential buyers or tenants for a property than a local newspaper can. It's also kept adding new services, such as local valuation alerts or agent microsites (these are similar to eBay shops, allowing users to personalise their presence), which means it has been able to keep on increasing its prices.

It has also been able to profit from the government's Help to Buy scheme, which has caused the housing market to boom again by helping housebuilders promote their developments. In return, housebuilders are typically paying Rightmove 50% more per month than estate agents do.

Advertisement - Article continues below

Given the company's powerful market position and buoyant housing market it's no surprise that stock-market analysts expect Rightmove's profits to keep on rising by 20% per year. But storm clouds could be gathering on the horizon. In many markets, high profits attract competition and prices come down. Could Rightmove be vulnerable to this?

It seems that a growing number of estate agents are becoming concerned about the power of Rightmove and the prices that it charges. Five years ago, an estate agent's office was paying just over £300 per month for Rightmove to advertise its properties. That figure will probably be £600 in 2014. For many agents that's too much. They are worried that left unchecked they could be paying £1,000 per month in five years' time.

Advertisement
Advertisement - Article continues below

So, big agents such as Savills and Knight Frank have teamed up with Ian Springett (the founder of Primelocation.com) to form Agents' Mutual a rival portal that will be owned by the agents who advertise on it. It plans to launch later this year or in 2015 and it's rumoured it will charge around £400 per month, falling to £250 in five years.

Advertisement - Article continues below

Will this really damage Rightmove? Sure, reducing its fees to £400 or £250 would see much lower profits, but can a new entrant really build up the scale and branding of Rightmove quickly? Would agents really want to dump Rightmove? Would house hunters find it to be as good?

It's by no means certain. But what does seem clear is that Rightmove's business model could face a challenge over the next couple of years. If it can't keep on jacking up its prices then it may struggle to grow as the number of agents it is taking on isn't really changing. Help to Buy has also created something of a false market for property, which cannot go on indefinitely.

Should you buy the shares?

As good a business as Rightmove is, the risk of disappointment looks too high at the current price. Returns from dividends are very small as well, while the large sums of money being spent on buying back shares seem a poor return on shareholders' money.

Long-term shareholders might be content to stay on board, but we wouldn't be chasing the shares now.

Verdict: avoid

Rightmove (LSE: RMV)

676_Right-Move

Dividend cover

Return on equity (ROE)

676_Numbers

Directors' shareholdings

Advertisement
Advertisement

Recommended

Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Share tips: eight stocks that should deliver robust returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Dec 2019

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020