David Kuo’s Personal Income Portfolio “Cornerstone Stock” No. 3 Rightmove (LSE: RMV)

Fact box

Headquarters: Buckinghamshire, England, United Kingdom
Website: www.rightmove.co.uk
Industry: Internet Software and Services
Volatility: Medium (5-year beta: 1.02)
Market cap: £4,283
Cash/debt: £25.0 / £0
Revenue (TTM): £243.3
Earnings (TTM): £144.1
Recent price: £47.49
Yield: 1.1%

TTM = Trailing 12 months

Dollar amounts in millions except recent price

Data as of 16 May 2018

Recommendation

What The Company Does: Rightmove (LSE: RMV) does not immediately come across as a property company at first sight. But it plays a vital role in the United Kingdom in connecting property owners with buyers and renters.

Founded in 2000, Rightmove was a company at the right place at the right time. The internet was still in its infancy and the company was able to make the most of its head-start to establish itself as the UK’s largest property network for property buyers and sellers to meet and gather information.

Rightmove’s business is fairly simple. Consumers in the UK looking to buy a home or rent a place can use Rightmove’s site for free. On the other end, real estate agents, letting agents, and new home developers have to pay to list and advertise their properties on Rightmove’s portal.

 

Why We Like The Company:

 

If we were to summarize what we like about Rightmove into two words it would be — “network effect”. The diagram below summarizes how the company’s competitive position increases as it scales up.

 

 

Source: Rightmove’s annual report

Essentially, as more properties were listed on Rightmove’s platform, more consumers turned to the company to search for a place to rent or buy. As more eyeballs appeared at Rightmove, the number of listed properties on its website increased too.

At the end of 2017, Rightmove sites received over 1.5 billion visits who spent an astonishing 11.7 billion minutes there. On the other end, Rightmove had one million listed residential properties, a third more than any other portal. Rightmove’s customer count also grew past the 20,400 mark.The high consumer traffic enables Rightmove to charge fees for the use of its site.

The graph below shows the number of customers on Rightmove’s portal, and the average amount spent by each customer between 2012 and 2017.

 

Source: Rightmove’s annual report and presentations; note: ARPA refers to average revenue per advertiser

From 2012 to 2017, the number of Rightmove customers rose from around 17,700 to over 20,400. At the same time, the average amount spent by each customer per month grew from £529 to £922. In other words, the pound-spend increased alongside the number of customers that came on board.

The twin effects of an expanding customer base and higher average spend shows up in Rightmove’s financials, shown below.

 

Source: Rightmove’s annual report and presentations

Rightmove’s revenue increased at a compounded annualised growth rate (CAGR) of 15.7% while net profit rose almost 23% per year. As the company’s top line grew, much of the dollars flowed into free cash flow, which acts as fuel to fund its dividends.

At the moment, Rightmove has an unimpressive 1.1% dividend yield. But it is growth we’re after here; Its dividends have increased by 27% per year between 2007 and 2017.

 

The Risks Involved:

A downturn in the UK economy could affect the country’s housing market, which, in turn, could drag down Rightmove’s results.

We cannot ignore the potential impact of Brexit, or the UK’s exit from the European Union (EU). Negotiations between the two parties are underway, but as it stands, no one knows what the final terms will be. But Rightmove believes it can weather the potential impacts of Brexit as two-thirds of its estate-agency customers also provide rental services, which could lessen the impact of a downturn in the property market.

Rightmove will also have to navigate technological changes as they happen. In our view, the company has done a fine job so far navigating through the shift from desktop to mobile and changes in Google’s search engine. We will be keeping an eye on Rightmove’s efforts to stay ahead of the game.