Rightmove is the UK’s number one online digital property advertising portal. As the company states, 80% of the time spent on property portals in the UK is spent on Rightmove.
And that is a big statement. Rightmove has built a powerful business based on network effects, habits, and brand recognition. Its product is free to use for people looking to move, while professionals looking to advertise their properties are charged a fee. But their MOAT doesn’t rely on having the best site. Even if they didn’t, they have the views of potential customers. So professionals need to pay Rightmove since it is where their clients are.
This competitive strength has translated into a great pricing power that Rightmove hasn’t been shy to show. Consistently rising prices, the company has increased its revenues and net profits consistently over the years. Only during the pandemic, the company took a hit in revenues and net income, to then go back to normal.
Competition
CoStar is “moving in”
CoStar, an American group within the business of Real Estate marketplaces, has recently bought one of Rightmove’s competitors: OnTheMarket
OnTheMarket (OTM) was launched in 2015 with the task of dethroning Rightmove as the leader of the property portals market. It was created by several agents who were tired of being skimmed by Rightmove’s prices, so they decided to create an agent-owned platform to help other agents do business.
Back in the day, OTM advertised itself as a cheaper alternative to RMV, with its top-end price being lower than RMV’s average price. They also pushed marketing heavily to reduce the gap between them. But it didn’t work well. As of the end of 2023, Rightmove’s market share was over 80%, while OTM was the third player with about 7% market share. The second player is Zoopla.
CoStar has paid for OTM £99 million and has stated that they will invest £46.5 million into sales and marketing in the first full year. According to their latest conference call, results are already showing up, since the traffic to OTM’s web has increased by 81% in January. If we check “similarweb”, from December to January the number of visitors has increased by 7.2M from 10.9M, meaning an increase of 66%. Meanwhile, Rightmove has increased the number of visitors in the same period by 24.5M (from 102.5M), meaning an increase of 23.9%
Will OTM work?
Why RMV is a good opportunity.
The issue with companies with great moats is that they deflect competition time after time. OTM tried to push RMV off the market with lower prices and marketing. Now, CoStar is trying to do the same that didn’t work in the past. They definitely think that they’re better than the previous management.
It is true, though, that CoStar is 10 times bigger than RMV (in market cap). Thus, they can use their deep pockets to push marketing and compete with RMV. That’s what they’re doing in the US, advertising in the Superbowl and spending big time to gain visits. And that is what the market fears with RMV. A war.
But this has happened before, and RMV’s management looks calm
History doesn’t repeat itself, but it rhymes
The industry has gone through rough times in the last years in the UK. Despite that, RMV has managed to keep growing profits and revenue. And that may piss off their clients. However, the user is captive to RMV, meaning that professionals have no alternative. Yes, this attack looks more serious because it is coming from a big player. But even big players get tired of losing money, and overcoming a MOAT is never easy, nor cheap. So even if RMV faces some short-term challenges, I have no doubt that they will be, once more, the winners of the war.
INTRINSIC VALUE OF RMV
The risk of the investment relies on CoStar being successful in increasing OTM’s market share. In all other scenarios, the margin of safety is wide enough to invest in RMV
As we stated before, CoStar paid £99 million for OTM. According to their latest (adjusted) operating profit, of £4.3 million, that means a multiple of 23 times operating profit. If we apply this same multiple to Rightmove’s operating profit (without adjustments), we would obtain a market cap of £5,935 million. That gives us a margin of safety of over 31%. And since CoStar is an informed competitor within the industry, I consider that we should pay attention to this margin of safety.
Furthermore, that multiple of earnings was paid for a company with a 7% market share. If they had bought the market leader, the premium should have been higher, which means that the margin of safety of the investment is even higher.
Given that the free cash flow conversion is high, and applying the fair multiple of the company based on its business risk, financial risk, earnings visibility, growth, and dividend yield, we arrive at a fair PE ratio of almost 25 times.
Given the company’s net income of £199 million during the last year, that would be a valuation of £4,975 million, or a 10% margin of safety compared with the company’s current Enterprise Value.
Of course, I’ve taken into consideration the current situation of OTM, pricing in the risk of CoStar being successful. If they weren’t, the business risk would be much lower, and we could easily apply a PE ratio of 30 times, which would lead us to a valuation similar to the previous scenario (£5,970 million).
In investing, the value of the companies is based on the future. But the future is always uncertain. That is why we always ask for a margin of safety when we invest.
Of course, the thesis could go south if CoStar gains traction, Rightmove loses customers and final clients visit OnTheMarket more than they do now. But eventually, as it has happened before, chances are that CoStar will pour money into a black hole, only to notice afterward that they couldn’t make a company with a big MOAT fail either.
Anyway, it is necessary to watch the market’s trends in the coming months and years to see if Rightmove’s competitive advantage gets eroded.
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