Since the beginning of 2022, Rightmove (OTCPK:RTMVF) is down around 25% due to macro headwinds.Shares trade at discounts relative to his pre-COVID levels, at 10-year low EV/EBITDA foundation. This is due to the fact that the business has seen consistent growth in recent years, gaining up to 80% market share over the past decade, enjoying a very strong moat of competition in the market, and very competent management. Even though they are proud of their ranks. In an inflationary environment, equities may even be a net beneficiary (with EBITDA margins as high as ~70% or more) as inflationary pressure on input costs is minimal given the digital nature of business. I believe the market has misvalued the business and not fully recognized the strength and attractiveness of the business model.
A brief introduction to Rightmove and its marketplace, Rightmove is an online real estate portal industry operating as part of a duopoly with Zoopla, along with minor players such as OnTheMarket.
Essentially, Rightmove connects realtors and new home developers on one end of the market with users buying or renting properties on the other end. Rightmove makes money by charging agencies/developers monthly fees and selling additional marketing services to agents/developers who seek to promote their listings to users browsing Rightmove’s listing portal . In most cases, these fees are billed per physical office and are not billed to you by Rightmove. Agencies account for the majority of revenue – about 75% in the first half of 2022
As the dominant market leader in the UK with over 80% market share, the business enjoys a strong competitive moat and has been able to consistently maintain its competitive advantage over its peers. . For the last 10 years.
First, due to the nature of the online real estate portal industry, the fact that it has a majority market share creates a solid barrier to entry for other competitors. A home is his one-time purchase that is unique and is often the largest of his one-time purchases for an individual. This is because (i) users typically want to see and rate the largest selection of properties, and (ii) agents/developers likewise want the properties they manage to be presented to the largest number of users. It means that you want to be So, the more users of the platform, the more agents and developers want to participate in the platform. Similarly, the more listings there are as a result of having more agents/developers, the more users will want to join them. Both want to be with the biggest player, in this case Rightmove, which has over 80% market share, making it difficult for new players to successfully penetrate the market.
Secondly, it mainly competes with two other players (Zoopla and OnTheMarket) and often competes with them. Prime Location is a Zoopla affiliate, but Boomin was liquidated in his October 2022.
Rightmove’s first mover advantage has enabled it to capture a large portion of the market since 2000 by accumulating both agents/developers and users. Zoopla has largely tried to do this, as neither side has little incentive to move to other online platforms. in two ways. 1) Offer agents/developers lower fees than Rightmove when listing properties. Zoopla ARPA is about a third of Rightmove. 2) provide users with a variety of additional services that they are likely to encounter when purchasing a new home; While it’s true that Zoopla has historically seen some growth fueled by a string of acquisitions, growth has slowed, especially since his OnTheMarket launch in 2015. This allowed OnTheMarket’s agent to only list on his one other portal, either Rightmove or Zoopla. Given that the number of agents using Zoopla dropped by 16% in his 2015, it seems that agents see his Rightmove as a “no-drop” platform, leaving Zoopla to compete with his OnTheMarket. .
These factors have contributed to Rightmove’s strong pricing power and consistently maintained its fixed customer base by increasing ARPA, which represents average revenue per advertiser, at a CAGR of approximately 10%+ over the past decade. It allows you to take advantage of Time to keep the number of agents/developers onboard. The fact that Rightmove also has no cost of revenue, most of which is the result of administrative costs through labor and rent, and is unlikely to rise as quickly as revenue, reflects its strong revenue growth to date and high revenue growth. reflected in both. Attractive EBITDA margins. After a sharp drop in 2020 as advertisers naturally cut back on marketing spend during COVID, business will rebound significantly in 2021 and with such an attractive business model, Rightmove will see ARPA grow over the next few years. We should be able to continue to enjoy strong earnings growth as we grow.
Sales and EBITDA continue to show strong growth over a historic period. Similarly, the business generates very cash flow with minimal capital investment requirements. FCF is typically around 90% or higher. Meanwhile, management has also demonstrated a willingness to return value to shareholders. For example, in FY21 we issued a £78m dividend and bought back £200m of shares.
Future growth opportunities
Rightmove also has an opportunity to move forward.
Most agents/developers are already online on either Rightmove or Zoopla, suggesting that growth in agent/developer numbers may already be capped. Despite the plunge, Rightmove has seen its 2021 ARPA surpass its pre-COVID numbers almost immediately as it continues to offer its customers higher quality products. In its first half 2022 earnings release, CEO Peter Brooks-Johnson hinted at an increase of £100 as the expected pace of business moving forward into fiscal year 23.
In 2017, Rightmove also hinted at a long-term ARPA target of 2.5k. At that time, ARPA was only at the 1k level. Given that APRA has continued to increase by around 30% to 1.3k since then, management has been able to achieve this and is on track to meet its pre-set targets. , giving credibility to future predictions.
Attractive entry point following macro concerns
Since early 2022, the stock has fallen about 25%. In early 2022, broader macro concerns, such as the escalating war in Ukraine, pushed this further, and in September 2022, stocks fell further as investors were shaken by the then-British government’s new economic plans. Did. While the political (and economic) situation in the UK stabilized following the appointment of a new prime minister at the end of October 2022, and stocks have since recovered slightly, Rightmove is down about 1% compared to his pre-COVID levels. It’s trading at a 15% discount. The price level offers an attractive entry point, but it’s even more attractive on a near-term EV/EBITDA basis with the share price at 18-19x, a 10-year low.
NTM EV / EBITDA (X)
Despite the negative macro environment in 2022 and rising mortgage rates in the UK, the number of housing transactions (582) that took place in the first half of 2022 was lower than in the first half of 2021, but higher than in the first half of 2019 ( 541), an increase of about 8% compared to before. -COVID. There was even renewed hope that mortgage rates were expected to fall in the short term following the Bank of England’s recent proposal that inflation could be contained sooner or later. This should naturally strengthen the outlook for the domestic real estate market and lead to a more attractive environment for Rightmove’s business.
Regardless, even in an inflationary environment, Rightmove is likely to make a net profit. Being 100% digital, there is minimal inflationary pressure on input costs. Conversely, in an inflationary environment driven by price increases, there is definitely room for earnings growth. While management has said it doesn’t see price increases as a function of inflation (instead, it’s based on the value it delivers to customers), Rightmove is likely to benefit from an inflationary environment. . Given the importance of the Rightmove platform to the customer’s business, demand may be price inelastic.
A prolonged and severe downturn in the UK property market over the next few years could lead to a slowdown in the number of housing transactions, ultimately forcing the closure of some agency/developer offices, said Rightmove. may adversely affect However, in such scenarios, agents/developers should first consider reducing marketing spend in other areas before assessing whether it may reduce visibility in such areas. (e.g. offline spending, online spending to smaller portals with less reach, etc.). Big platforms like Rightmove. Smaller players will also need fewer resources to survive these difficult times, and Rightmove may gain market share against its competitors during downturns.
Fundamentally, Rightmove has a very attractive business model with a strong economic moat. Recent macro headwinds have provided an opportunity for a cheap entry point into the stock, even though the company is likely to be the net beneficiary of the market downturn. , financial performance is above pre-COVID levels (e.g., EBITDA is now higher), but stock prices are below pre-COVID levels. The business’s high cash flow generation combined with management’s historic willingness to return capital to shareholders make this a very attractive situation.
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