Once a darling of the stock market, property listings site Rightmove (RMV) is losing friends and making enemies. Grumbling among its estate agent clients has exploded into mounting dissent following the company’s apparent tone deaf response to the coronavirus crisis.

Despite its strong balance sheet and low cost base, both useful attributes to have in the current climate, there are clear risks to the company’s earnings growth and we do not think the shares have fallen enough to be worth buying yet.

In this article we will explain why Rightmove has gone from being a business everyone loved to a company many people now hate.

HOW RIGHTMOVE BECAME NUMBER ONE

Created in 2000 as a joint venture between property agents Halifax, Countrywide (CWD), Connells and insurer RSA (RSA), Rightmove was first listed on the London Stock Exchange in March 2006.

It sells a subscription product to estate agents and housebuilders allowing them to list properties on the site. It also provides data analytics and tools intended to improve the prospects of making a sale.

By establishing a market leading position early on Rightmove created a virtuous circle and enjoyed rapid growth as property listings migrated from the pages of newspapers and onto the internet.

It benefited from what is called a ‘network effect’. Rightmove’s website had the most listings and was therefore the one which prospective property buyers would go to when looking for their next home.

This reinforced its position as a must-have product for estate agencies and generated significant pricing power when it came to securing subscriptions from agencies.

Supporting this staying power was the fragmented nature of the UK estate agent market which meant agents individually and the industry as a whole had a weak bargaining position.

CUSTOMERS SQUEEZED

This position helped Rightmove boost average revenue per advertiser (ARPA) from £684 per month in 2014 to more than £1,000 by 2019 and enabled it to generate operating margins above 75%. Reportedly the company had talked to analysts and institutions about eventually getting ARPA to £2,500.

Its main route to growth was signing up the majority of UK estate agents alongside, to a lesser extent, targeting the new build space.

However, there have been portents that suggested the company might have squeezed its customer base too hard.

The launch of OnTheMarket (OTMP:AIM) in 2015 was a clear attempt by the estate agent industry, some of which backed the venture, to unseat Rightmove from its dominant position.

Five years in and the challenger has found it pretty tough going, with its shares trading well below the 165p issue price from a 2018 IPO even before the coronavirus-inspired market correction.

In the short term it arguably reinforced Rightmove’s status as the leading player as a now abandoned rule requiring estate agent users of OnTheMarket to only patronise one other portal hit the other main player in this market, Zoopla.

Rightmove continued to grow and its share price reached an all-time high (adjusting for a stock split in 2018) of 710.6p in February 2020, at which point it was trading on more than 30 times forecast earnings.

CRACKS IN THE FOUNDATIONS

However, even before the coronavirus crisis threw the property market into turmoil, cracks had begun to emerge in the foundations of the Rightmove growth story. Its most recent full year results (28 Feb) showed agency numbers down 6% for 2019 and growth in ARPA continued to tail off.

The trickle of agents moving away from the platform risks becoming a deluge in the wake of Rightmove’s botched response to the coronavirus crisis.

Despite the buying and selling of property coming to a standstill, leaving estate agents without any income, Rightmove initially offered only its most loyal customers the opportunity to defer some fees for six months with lots of strings attached.

Within 48 hours a backlash prompted a rethink, with bills cut by 75% across the board for four months. The expected hit to revenue from this measure is in the order of £75m.

Rightmove withdrew earnings guidance, suspended its dividend and confirmed its eligibility for the Treasury and Bank of England’s Covid Corporate Financing Facility, which might signal to clients it is sharing in their pain.

AGENTS LOOKING ELSEWHERE

Some observers believe this is too little, too late. Jefferies analyst Giles Thorne says: ‘Rightmove’s management may think that its four-month fee discount has now put its relationship back on a sustainable footing. We see the opposite: we see its actions as directly leading to an opening of the floodgates.’

Previously, leaving Rightmove would have represented a big leap of faith for agents. With the housing market now in hibernation, they may feel they have less to lose.

Evidence of collective action in the industry can be seen in the ‘Say No to Rightmove’ campaign spearheaded by Rob Sargent, chief executive of London-based estate agent Acorn.

The campaign says it has signed up nearly 1,500 members, representing 2,700 branches. Initial results from a survey of these members apparently shows 90% of those with Rightmove are considering leaving unless the discount period is extended or the pricing structure is overhauled.

Interestingly OnTheMarket is seen as the portal which offers the best value for money. The company should announce its full year results at some point in June, when investors can also expect an update on trading.

OnTheMarket’s broker Shore Capital says the company will become stronger as a result of the market dislocation. Analyst Roddy Davidson comments: ‘We look forward to more information on the rate and value at which the company has converted agents from free to paying contracts (a key factor performance driver) when it next reports.’

The expert's view

Roddy Davidson at Shore Capital says:

‘Rightmove is a high-quality company with a tried and tested business model, a dominant market position, a consistently executed strategy and an excellent track record.

‘However, we are concerned that following a sustained period of substantial price inflation, agents are likely to prove increasingly resistant to paying more – particularly in view of the highly competitive nature of the residential property market.

‘We would not generally expect agents to entirely delist from Rightmove but we do think there is real potential for them to opt for lower cost listings packages to control overheads and/or divert spend to other lower-cost portals such as OnTheMarket with a view to increasing their reach and profile and improving their chances of securing listings.’

ZOOPLA’S CASH-RICH BACKER

The private equity-backed Zoopla came up with a more generous offer to agents than its main rival as coronavirus struck by offering nine months free on its portal if agents promise to leave Rightmove.

Liberum analyst Harry Read says: ‘SilverLake (Zoopla’s private equity owner) continues to be awash with cash and is seeking to raise a further $16bn for another buyout fund, so the capacity to withstand initial cash haemorrhage necessary to displace Rightmove is feasible.’

In Thorne’s view the only option for Rightmove to protect its market position is to consider a permanent 10% fee cut. He has cut his earnings forecasts for 2020 and 2021 by up to 30%.

On his lower estimates the shares trade on a 2020 price-to-earnings (PE) ratio of 35.3 times and a 2021 PE of 30.4. That’s too high given the challenges currently facing the business. 

While Rightmove has been a great share to own in the past, there is a feeling the stock could become cheaper to buy if the backlash against the company gets worse. We would wait until there is a decent pullback before considering the shares.

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