UK-based Rightmove (LSE:RMV, Financial) operates the country’s number one real estate portal, which aims to make home moving easier (as indicated by the company name) through a simpler and more efficient property market place.
The company was formed in 2000 as a joint venture between four of the UK's largest property agents. As of the latest filing, individual insiders account for approximately 1% of total shares outstanding, which should be insignificant for a ÂŁ6 billion Pound (approximately $7.81 billion) market cap business from a minority shareholder perspective.
The customers at Rightmove mainly include estate and letting agents (75% of fiscal 2018’s total sales) and new homes developers (17%) advertising properties for sale and rent. In terms of revenue, monthly subscriptions and frees for additional advertising solutions represent the principal sources. The prepayment model enables the company to consistently generate more free cash flow than net income.
Through a classic “classifieds” type of business model, Rightmove builds a wide and deep economic moat to protect its extraordinarily superior return on capital. The company’s platforms, in aggregates, share almost 80% of total traffics in the space compared with the remaining 20% or so mainly split among Zoopla.co.uk (LSE:ZPG), Onthemarket (LSE:OTMP, Financial) and Primelocation. The absolute dominance in the industry attracts more listings from customers, which, in turn, gets more traffic, creating a cycle for Rightmove to remain a “turn-to-first” place for both customers and consumers.
The massive and sustainable competitive advantage in a focused local market is why Rightmove could deliver an improving and industry-beating return on assets for more than a decade (see below) compared with its UK peers as well as its overseas counterparts like Zillow (ZG, Financial) in the U.S., Scout24 (FRA:G24, Financial) in Germany and REA (ASX:REA, Financial) in Australia.
We are not as confident in Rightmove’s long-term growth prospects as in its ability to fend off competition. It should be noted that the average revenue per account (referred to as ”ARPA”) has increased steadily from £308 per month in fiscal 2009 to £1,005 in 2018, more than tripling in a decade. In the meantime, the total advertiser base grew by roughly 16%. It appears to us that the long-term growth of the business will be driven mainly by the company’s ability to charge more per advertiser. Rightmove’s model primarily depends on its platform traffic to deliver customer value and try to monetize alongside the process.
Nonetheless, we notice that the growth in traffic has declined dramatically from more than 20% annually a few years ago to a low-to-mid-single-digit rate last year, and then to no growth this year. While the secular trend of digitization in the property advertising industry should continue, the business is seeing some signs of market saturation. Of course, Rightmove can keep gaining market shares and raising prices, but neither option may lead to a result that is sustainable enough. A third option is to expand into adjacencies, such as commercial properties, overseas markets or data services. In that case, shareholders will have to wait and see, as their revenue contribution is far from being material at the moment.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Rightmove.
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