Updated: a day ago
Rightmove is the UK’s favourite online property portal. It earns its revenue by selling memberships and other promotional packages to its client base of estate agents and new home developers who are looking to advertise their properties on Rightmove’s online portal. Rightmove has a unique network effect’ in its property niche, with a market share estimated at over 80%, delivering over 2 billion visits from house-hunters in 2020. Rightmove has cemented itself as the first place to look when you are browsing for a home. Therefore, estate agents realise that they must list their properties on Rightmove in order to get them sold or let. This unique network effect has been very positive for Rightmove and its investors over the last decade, with the shares rising over 450% in the last ten years. However, Rightmove has now penetrated much of its potential client base of estate agents and developers, and there are signs that its current client base is becoming disgruntled with Rightmove’s hefty chunk of the property market profit pool and its continual price hikes for its membership plans. With a significant change to the nature of doing business in the property industry due to the pandemic, will Rightmove continue to be successful and deliver gains for shareholders?
Rightmove was founded in 2000 and was created by the four biggest corporate agencies at the time: Countrywide, Connells, Halifax and Royal and Sun Alliance. Initially allowing for free listings, Rightmove switched to a paid advertising platform in 2002. Rightmove listed on the London Stock Exchange in 2006 and has some well-known asset managers listed as major shareholders, such as Baillie Gifford and Fundsmith LLP. As the Rightmove business model has been focused on hosting a very high-quality web portal for the property industry, Rightmove has very low costs and operates with significant profitability. Its operating margin in 2019 was 73.9%, which is one of the best operating margin ratios I have ever seen, especially for a relatively large company worth over £4bn. As alluded to earlier, Rightmove has likely hit a near saturation point in terms of client numbers in the UK. However, with the addition of add-on promotional packages, optional tools and customer analytics, Rightmove intends to increase average revenue per advertiser (ARPA) over time.
The year of 2020 was eventful in many ways for Rightmove. The onset of the pandemic and subsequent lockdowns in March last year threw the property market into a tailspin. I think the scars remaining from the 2008 financial crisis likely added to fears that this impending crisis would create significant trouble for the UK property market and would impact Rightmove’s client base of estate agents. Rightmove acted in April to reduce its membership fees by 75% till July, and a 60% and 40% discount were introduced sequentially thereafter in August and September. Rightmove’s fees represent a significant cost for its client base and are typically at an average of around £1000 a month per agency branch. These fee reductions were probably the right move (pardon the pun) for the company in the long run to help preserve the financial health of its customer base.
Although the onset of the pandemic caused much trepidation for the property industry, an unforeseen event would dramatically change the course of 2020 for the UK real estate market. On the 8th of July 2020, the government introduced a Stamp Duty holiday, reducing the effective tax rate on home purchases by increasing the non-taxable threshold to £500,000. This, in addition to an increasing need to prioritise living quality and access to outdoor space, lit a fire under the British property market. The Stamp Duty holiday threw a much-needed lifeline to the property sector and helped to create a steady increase in UK house prices. Rightmove have since been able to remove the membership discounts seen in mid-2020, and in December, Rightmove saw ARPA creep back up to above 2019 levels of £1103 compared to the average for 2020 of £778.
Looking at the results in 2020, Rightmove has managed to navigate the year's challenges pretty well. On the client side, membership numbers declined 3% to 19,197 primarily due to 425 estate agents giving up the platform in 2020. This is a solid performance in a year where estate agents likely struggled with the increased costs associated with operating in the pandemic and lower input volumes from new developments as projects were put on hold. Revenue from clients also declined by 29% compared to 2019, largely due to the membership discounts throughout 2020. However, operating margins held up pretty nicely at 67% due to practical cost savings over the course of the year. On the user side of Rightmove, results in 2020 were impressive. Site traffic grew 31% with over 2 billion site visits in the year. Time spent on site also surged to 15.9 billion minutes, cementing Rightmove as the place to be for advertising properties. From the company presentation (shown below), it looks as though a fair portion of Rightmove’s increase in customer traffic has been derived from increasing its market share over the smaller competitors in its market, namely Zoopla.
Rightmove also made progress in its additional offerings to clients with ‘Sold By Me’ and ‘Local Valuation Alert’. Launched in 2019, ‘Sold By Me’ allows potential house sellers to find local successful agents, driving traffic to estate agent websites and ‘Local Valuation Alert’ puts potential sellers in contact with estate agents in their area, leading to potential listing wins. Improvements were also made in more mature optional packages such as ‘Premium Listing’ and ‘Optimiser’. Rightmove also improved its engagement with potential home seekers by creating a video viewing option on the website, with 40,000 videos uploaded by the end of 2020. This option is likely to stay post-coronavirus as it has the unique ability to sift out uninterested buyers, reducing the viewing rate by 50% and further saving costs that would be borne by the estate agent.
Although Rightmove seems to have operationally shrugged off 2020, there are a few key challenges that present themselves to Rightmove going forwards.
Firstly, during the year, Rightmove has faced an uprising from disgruntled estate agents with a high profile campaign, ‘Say No to Rightmove’, a petition which has 1850 agents signatures. The campaign website proclaims to be a protest to the unfair level of profitability Rightmove generates and its overall control of the property listings market. A sell-side research note from Jefferies, the equity research firm, entitled ‘The Donkey’s Back Is Broken’ was published in 2020 and was highly influenced by the collective action from the campaigning agents, further adding to the worries over Rightmove’s future. Estate agent memberships are key to Rightmove’s success, so a significant decline in membership numbers could prove challenging for Rightmove in the years to come.
A second key challenge on the horizon could be competition. Rightmove has pretty much obliterated competitive threats from its UK peers Zoopla and OntheMarket in recent years. I am more speaking to the future threat that could be derived from the large and well capitalised US portal, Zillow. Zillow is roughly 10 times as big as Rightmove in terms of market capitalisation and revenue. A move by Zillow to enter the UK market could be troublesome for Rightmove and its share price. Competitor entry can also come from translational platforms such as Facebook or new start-ups, seen recently in the auto sales industry with the arrival of Cazoo to compete with sector incumbent AutoTrader. As with any company that is generating 75% operating margins, competitive suitors often arrive to take aim at the incumbent firm. In Rightmove’s case, investors have to hope that the platform’s network effects provide enough of a moat to defend the high-profit margins.
Lastly, Rightmove has the challenge of growth. There is an estimated 21,000 estate agents doing business in the UK, for which Rightmove has 16,000 signed up to membership plans. Whilst there is still room to grow into the overall market, penetration will become more difficult as Rightmove grows further into the addressable market. There is an argument to be made that if you (an estate agent) have not signed up to Rightmove thus far, you may not need its services. Therefore, in order to grow revenues, Rightmove either needs to increase sales of add-on services, increase prices or expand internationally.
So, what does Rightmove have at its disposal to navigate these challenges?
To navigate the challenge of the disgruntled customer base, Rightmove arguably has one mission: to make cancelling a Rightmove membership a deeply unprofitable venture — estate agents are businesses after all and are guided by profits. Whilst clubbing together to invoke a response from the leading platform may work, any action to leave Rightmove will affect each estate agent’s profitability on an individual basis. No matter how loud the combined voices are to leave Rightmove, so long as leaving Rightmove would result in lost sales, business leads and important customer analytics, the overwhelming majority of agents will choose to stay. For the moment, Rightmove is excelling in executing on this strategy as seen by the 31% increase in website visits in 2020 and the increase in market share to well above 80%.
The competitive threat is more difficult to analyse and would likely result in a short-term decline in the share price should a new competitor announce their entry into Rightmove’s market. We do know international expansion is tricky (take a look at Purple Bricks botched attempt to enter the US) and since its inception, Rightmove has chosen to remain within its own market. The largest threat, presented by Zillow, is somewhat tapered by the fact that although Zillow is still growing at quite a clip in its home market, as of 2020, it is deeply unprofitable with an operating margin of 2%. Due to being in an unprofitable, high-growth mode in its core market, I wouldn’t expect Zillow to make a risky venture into the unknowns of the British property market, especially with the competitive might of Rightmove to battle against. However, stranger things have happened! International expansion could happen for the largest property lister, and to some respects, investors would have to re-analyse the investment case for Rightmove if the situation were to present itself.
Lastly, and most importantly, the challenge of growth for Rightmove is probably the most likely to cause issues for the company going forwards. To promote growth International expansion could be an option, but this carries significant execution risk and would most likely impact profitability in the medium term. I would expect that Rightmove could choose to earn a significant income from licensing its brand and platform to third parties in distant geographies in the future, which would be earnings accretive and low risk. This has been done in the past by other platforms such as AutoTrader licensing in geographies such as Australia. For now, Rightmove seems to be focused on extending its breadth across the property purchase lifecycle in the UK, with a recent acquisition of Van Mildert, a landlord and tenant protection services portal that aids referencing in the lettings process. By building an ecosystem of solutions across the property industry, Rightmove not only grows its revenues but also cements its position as a necessity for both its clients and prospective house hunters.
In terms of financials, the table above shows the profitable prowess of the property platform. Revenues have been growing adequately up until 2020, at an average of 9%, and revenues are expected to bounce back to growth in 2021 followed by a more normalised growth rate as seen in the years prior to 2020 going forwards. Immediate attention can be drawn to Rightmove’s operating margin, which is typically around 75%. I would expect this to be the highest amongst the FTSE100 index. Return on capital employed (ROCE) figures are so high they almost don’t make sense! An average ROCE of 575% over the last four years explains how little capital is required to run the very profitable Rightmove platform (you can be assured these figures are correct as I have taken them from the company accounts for each respective year, not a third-party website). For reference, the average ROCE for a FTSE100 company is around 10%. Rightmove’s ROCE figure has declined dramatically in 2020 to 100%, as Rightmove suspended all dividends and share buybacks, opting to keep the cash in hand. This doubled their cash position, and thus increased the ‘capital employed’ by Rightmove — a key contributor to the ROCE calculation. So, in summary of the financial metrics, Rightmove is a company that is growing moderately but has an immense ability to turn revenue into profits.
Finally, looking at valuation, the tables above show the valuation for Rightmove on an individual basis, with a brief look at its two closest comparable peers: Zillow, the US property portal and Scout 24, the German-listed property portal. As you can see, both Zillow and Scout24 are not as profitable as Rightmove. However, Scout24’s 50% operating margin does make evident the profitable nature of this particular niche.
The clear picture painted by this comparison is the extent to which Rightmove is undervalued by the market. Scout24, arguably most similar to Rightmove in terms of growth, is trading at just under double the valuation of Rightmove for estimated earnings in 2022. Scout24’s revenue is estimated to decline by 42% in 2020, which is significantly worse than Rightmove (albeit, I am not sure Germany did a Stamp Duty holiday!). Comparatively, Zillow’s valuation is in US ‘growth at any price mode’, and the shares have recently declined 30% from their heights, owing to the volatility you would expect from buying a stock at such a premium to the wider market. Zillow is a completely different beast to Rightmove and has a much larger market with a much larger profit pool to capture ahead of it, but should there really be such a disparity between the valuations of Rightmove and its international peers? Either way, at current prices, I would much rather purchase Rightmove over either Scout24 or Zillow; only time will tell if that is the right decision.
Looking at Rightmove on an individual basis, I think 25 times 2022’s estimated earnings is a very fair price to pay for a company with such superior operating metrics. Keeping an eye on competitive disruption and growth in membership numbers should keep you well informed as to the Rightmove story going forward.