Investors betting against the mighty beast that is Rightmove have rarely found vindication in the 16 years since the business was listed on the main market. Between then and hitting a record peak at the end of last year, the shares rose 140 per cent in value, momentum that at one point during the pandemic afforded the shares an eye-watering forward earnings multiple of almost 58.
But the Rightmove bears must be feeling smug right now. The latest peak-to-trough fall in the shares is approaching the 43 per cent crash that preceded the onset of the national lockdown in 2020. Rising interest rates and concerns that falling real incomes could cause a more dramatic decline in housing transaction volumes and sales prices has resulted in mounting scepticism that Rightmove can sustain the same rate of revenue growth. A forward price/earnings ratio of 21 looks rich, but it is one of the stingiest attached to Rightmove in about eight years.
Proving that more can be squeezed out of its agent customer base will be the biggest challenge for the successor of Peter Brooks-Johnson, the chief executive, who announced he was stepping down this week after 16 years with the company.
Rightmove has earned the kudos it has gained from investors. The portal’s power is in its scale — homebuyers are attracted by the convenience of accessing the widest audience and agents are loath to resist stumping up to advertise on the platform for fear of missing out on business. The guarantee of many, many eyeballs has made increasing prices and convincing agents to take higher-value services an easier sell.
In the past decade, average revenue per advertiser has grown by 168 per cent, to £1,189 last year, with an agent retention rate of 91 per cent.
The result? Market dominance and operating margins north of 70 per cent, which would be the envy of most companies. A capital-light business model makes Rightmove a highly cash-generative company, with cash generated by the firm recovering to £237 million last year, equivalent to 105 per cent of operating profit in 2021. Naturally the group is debt-free and there is plenty of room for more share buybacks, analysts reckon.
A post-stamp duty break slump in housing transactions since this time last year is unsurprising, but deals in March were still slightly higher than the same month in 2019, according to the Office for National Statistics. A more pronounced downturn in either sales volumes or prices against that latter comparison would be cause for greater concern.
Rightmove’s revenue stream isn’t directly linked to the volume of listings, but rather the number of estate agency offices that choose to advertise their properties on the platform and its ability to increase prices and get agents to upgrade their subscription packages. That means the fortunes of estate agents are most crucial to Rightmove in proving that it is not past its best.
Analysts are split on how much of a threat the bleak economic outlook is for Rightmove. An easing in the growth in house prices could be mitigated if more homeowners seek to bank gains ahead of a prolonged downturn, reckons Berenberg’s Sarah Simon. But in the event of a more serious slowdown in the market, convincing agents to take services above and beyond the basic package could be tricky, argues Shore Capital’s Roddy Davidson. Upgrades are already a more important driver of growth, accounting for 60 per cent of the increase in average revenue per advertiser last year.
A serious fall in the market, big enough to cause a sizeable number of estate agencies to go out of business, seems a distant risk. But mustering the belief that Rightmove deserves to regain the same punchy rating it once had is also a reach.
ADVICE Hold
WHY A quality company — but one whose potential is already well accounted for in valuation
FD Technologies
Hoping to attain the sort of punchy rating that had been attached to tech companies, just as the market wants to dethrone highly valued stocks, is certainly a lofty ambition. Perhaps the emergence of a potential bidding war for Ideagen, its mid-cap software peer, has assured FD’s management of the sector’s enduring appeal.
Raising revenue and profit guidance for this year goes some way to justifying a re-rating in the shares, which were pushed 15 per cent higher on the back of a consensus-beating set of results for last year. Rising inflation and interest rates have hardly dampened investor confidence, with a forward enterprise value/earnings multiple of 19 from a post-pandemic peak of 24, less of a fall from grace than some groups.
The software group has three core businesses: a data consulting business catering to investment banks; a marketing analytics specialist, MRP; and its KX software business, which provides real-time data to clients about performance.
The last of these is where the biggest growth hopes lie. Recurring revenue for the KX business rose 25 per cent last year; management expects that to accelerate to between 35 and 40 per cent this year.
How sustainable is that pace of expansion? Selling to a range of industries from manufacturing companies to Formula One racing teams has opened up a wide market.
A deal with Microsoft, under which the tech giant sells the KX analytics software alongside its cloud computing platform Azure, stands to accelerate revenue growth further.
But hitting sales targets comes at a cost and raising investment in research and development and sales and marketing meant pre-tax profits for the group declined by almost a fifth last year. Investment is expected to continue rising this year, according to Seamus Keating, the FD chief executive.
Analysts expect a further 21 per cent slip in profits this year before a return to growth back towards 2021 levels of profitability in 2024. At least cash generated by the KX business is enough to sustain the money being pumped into funding that expansion; the group ended the year in a modest net cash position.
ADVICE Buy
WHY Shares could re-rate further if it can continue to hit ambitious growth targets
