Keep buying this online property seller as Britain’s economic boom moves closer
Rightmove’s dominant market position and sound finances add to its investment appeal
Britain’s economy is poised to enter a purple patch. A continued decline in the rate of inflation means it is now only a matter of months before it meets, or even undershoots, the Bank of England’s 2pc target. This should finally stir the central bank into action, with monetary policy easing now firmly on the near-term horizon.
Following time lags, interest rate cuts should have a very positive impact on the rate of economic growth and the stock market’s performance.
Of course, accurately forecasting a timeline for the above events is impossible. An infinite number of events could shorten or lengthen the time it takes for the economy to deliver an attractive rate of growth and for share prices to generate sustained capital gains. Therefore, investors in companies that are reliant on Britain’s economy must remain patient.
For example, shares in online property portal Rightmove continue to disappoint. They currently trade around 11pc lower than at the time of our original “buy” recommendation in October 2019. This means they have underperformed the FTSE 100 by roughly 19 percentage points over the same period, although the company’s recent annual results were somewhat encouraging. Revenue increased by 10pc versus the prior year, while operating profit was up 8pc year-onyear. This is in spite of the property market experiencing a highly challenging year, with residential property transactions falling by 17pc to just 1m as higher mortgage rates and the cost of living crisis weighed on demand. Both of these challenges are fortunately now in their latter stages.
Mortgage rates are extremely likely to materially decline as interest rates fall, while lower inflation should mean that elevated pressure on consumer spending abates. These changes are set to translate into increased housing demand and a higher number of transactions that acts as a positive catalyst on Rightmove’s operating environment.
Crucially, the company has been able to extend its dominance over rivals. In its latest financial year, over 86pc of all time spent on UK property portals was on its website. This was up from 85pc the year before and evidences an extremely strong competitive position that is being continually strengthened through the release of new products that make it the de facto choice among estate agents.
This contributed to a 9pc increase in average revenue per advertiser in 2023 that more than offset a 1pc decline in total membership amid tough trading conditions for its customers. This growth rate highlights the scale of reliance on Rightmove among estate agents. Indeed, it would not be an exaggeration to state that estate agents
‘Estate agents who do not use the company’s services are likely to find it very difficult to successfully operate’
in the UK who do not use the company’s services are likely to find it very difficult to successfully operate. This provides the business with an extremely high level of pricing power that should equate to further profit growth in the coming years. Alongside greater innovation, the company is continuing to expand into other areas that offer long-term growth potential. For example, it is ramping up investment in its commercial property market offering and increasing its range of rental services as it seeks to diversify in order to reduce its reliance on transaction volumes in the residential property market.
It will do so under a refreshed management team, with a new chief executive having been appointed last year. As with any company, management changes undoubtedly represent an additional risk for investors. However, the company’s updated strategy appears to be sound. And with a solid balance sheet that includes a net cash position in excess of £31m, it remains a high-quality business that is relatively low-risk. Trading on a forward price-to-earnings ratio of around 21, Rightmove’s shares remain relatively expensive at a time when the UK stock market is very cheap. But with the company having an enviable competitive position and very solid finances, alongside a sound growth strategy, it continues to merit a substantial premium compared with the wider equity market.
When combined with an increasingly upbeat outlook as inflation falls, interest rates are cut and the economy’s performance drastically improves, the stock offers significant capital growth potential. Therefore, while it has so far proved to be a disappointing recommendation, Questor remains highly optimistic in its capacity to deliver high returns over the long run.
Questor says: buy
Ticker: RMV
Share price at close: 532.4p