Rightmove: Reassessing after CoStar Entry & Lindsell Train Speculation

Company Update (RMV LN) (Buy)

Highlights

• CoStar wants to be #1 in the U.K. and will spend aggressively

• We believe “network effect” and “free” will protect Rightmove

• Nick Train comments point to Rightmove as a new position

• Shares at 19.3x 2022 EPS and have a 1.9% Dividend Yield

• We see 75% total return (19.9% p.a.) by end of 2026. Buy

Introduction

We reassess the situation at Rightmove after CoStar entered the U.K. market by agreeing to acquire OnTheMarket, and following speculation that Lindsell Train has started building a stake in their third U.K. buy since 2020.

Rightmove’s share price fell 14.3% on the day (October 19) CoStar’s acquisition of OnTheMarket was announced, and has now fallen by a total of 17.7%, taking them to one of their lowest levels in the past 5 years:

Rightmove Share Price (Last 5 Years)

Source: Google Finance (09-Nov-23).

Lindsell Train appears to have started buying into Rightmove in September, before the CoStar-OnTheMarket deal was announced, based on comments made by co-founder Nick Train in several recent interviews.

We believe Rightmove will ultimately be successful in defending its market dominance in the U.K., though the journey may be long and bumpy. OnTheMarket is a distant #3 in the U.K. market and CoStar has little in residential property to build on, but it is several times Rightmove’s size. CoStar has stated they want to make OnTheMarket the #1 player and will be aggressive in marketing spend. We believe Rightmove will be protected by “network effect” and being “free” to consumers, and will remain the first choice for substantially all its estate agent customers, with CoStar taking only some second listings. Examples from other industries support this view. However, Rightmove may have to moderate its pricing and invest more in the medium term, resulting in modestly slower earnings growth.

At 473.6p, Rightmove shares are at 19.3x 2022 Underlying EPS and have a 1.9% Dividend Yield. Our reduced forecasts indicate a total return of 75% (19.9% annualized) by 2026 year-end. Buy.

We upgraded our rating on Rightmove to Buy in October 2021 and added it to our “Select 15” model portfolio in July this year. We have also had a small position in Rightmove since July and bought more on October 19. (For a recap of the pre-CoStar investment case, see the Rightmove article we published on Substack in August.)

We discuss each of the above in more detail below.

Possible Lindsell Train Stake Building

Lindsell Train, a U.K “quality”-style fund manager with about £19bn ($23bn) assets under management (as of March 31), appears to have started buying into Rightmove, based on comments made by co-founder Nick Train in several recent interviews. (“Jack” on Twitter was the one who first spotted the connection, but we believe he is correct.)

Train first mentioned a new U.K. position in an interview with Investors’ Chronicle published on October 31:

“This malaise in the UK stock market, for me it's throwing up ideas I've just initiated into a FTSE 100 company actually with the biggest dataset in its industry.”

In an interview with the Financial Times’ Money Clinic podcast, published on November 7, Train described it further:

“It’s a FTSE 100 company with extraordinary profitability, an extraordinary market share. We’re able to access the equity of this business with the share price down maybe 40 per cent from its peak. It’s a business that we followed for many, many years.”

Rightmove is the best, and probably the only, FTSE 100 company that fits both descriptions.

In an interview with Interactive Investor, Train also said:

“We're currently actioning a new idea for the UK strategy. We initiated it about 3 weeks ago. It's a company that we first seriously looked at about 8 years ago. We've monitored it ever since. Maybe it would have been better if we bought it 8 years ago, but it definitely wouldn't have been better if we bought it 5 years ago. It's done nothing for about 5 years.”

Rightmove’s share price history fits the description, being at ~450p back in mid-October 2018 and having fallen back below ~500p by October 19, 2023. (The interview was described as having taken place in “mid-October”.) The emphasis on Rightmove’s poor returns since 5 years ago may also be significant – Rightmove is a top-10 holding at Smithson, the small-to-mid-cap fund run by Fundsmith, another leading U.K. “quality”-style investor, and has been so since Smithson’s inception in October 2018, i.e. 5 years ago.

Train’s comment about initiating the position “3 weeks ago” also means Lindsell Train has likely started buying into Rightmove in September, before CoStar announced the agreement to acquire OnTheMarket. This implies they saw Rightmove shares as attractive at a price significantly higher than today, albeit before the CoStar threat materialized.

OnTheMarket at Distant #3

We believe Rightmove will ultimately be successful in defending its market dominance in the U.K.

Measured in time spent on platforms, Rightmove’s market share has been at 85%+, with over 85% of traffic going to its site directly, thanks to its almost universal brand recognition:

Share of Time Spent by Platform (2019)

Source: Rightmove results presentation (H1 2023).

By contrast, measured in time spent, OnTheMarket has been a distant #3 (or even #4) player in recent years.

Among estate agent branches (estimated to number 24,500 in the U.K.), Rightmove counted around 16,100 as customers (as of June 2023), while OnTheMarket had only 10,400 paying customers (as of July 2023).

In addition, we believe Rightmove is the primary platform of choice for most estate agents, with agents on other platforms also listing their properties on the Rightmove. An Office of Fair Trading report (looking into the Zoopla-DPG merger) back in 2012 showed that, among estate agents who were on the Zoopla platform, only 10-20% used Zoopla alone; 10-20% also use Rightmove as their only second platform, while 50-60% also use Rightmove and DPG at the same time (the percentage who use Rightmove and some other platform was not disclosed):

Estate Agent Usage of DPG, Zoopla & Rightmove (2012)

NB. Numbers have been redacted at source. Source: Office of Fair Trading (Apr-22).

OnTheMarket is even more behind in financial size, given Rightmove’s higher Average Revenue Per Agent (“ARPA”):

• Rightmove: 2022 revenues of £333m, Adjusted EBIT of £245m

• OnTheMarket: FY23 (ending 31 January 2023) revenues of £34m, Adjusted EBIT of £4.3m

The history of OnTheMarket itself is an example of how difficult it is to challenge Rightmove’s market share. It was founded as Agents’ Mutual in 2013 by a group of large estate agents, as an attempt to challenge Rightmove and Zoopla. Tactics they tried included the so-called “one other portal” rule, which restricted their customers to only listing their properties on one other platform, and the award of equity ownership to customers. The company never made much progress, and the £100m acquisition price CoStar has agreed was basically flat from the valuation at its IPO in 2018.

The threat to Rightmove does not come from OnTheMarket, but from their soon-to-be owner CoStar.

Who is CoStar?

CoStar is a U.S.-listed commercial real estate information company with a market capitalization of $32bn.

CoStar has 6 segments, with the small Residential segment the only one similar to Rightmove’s core business:

CoStar Revenues by Segment (2018-23E)

Source: CoStar results presentation (Q3 2023).

• CoStar (38% of 2022 revenue) – subscription-based Commercial Real Estate (“CRE”) information platform

• Information Services (7%) – real estate and lease management solutions for owners, lenders and investors

• Multifamily (34%) – apartment marketing websites for landlords to attract and handle potential tenants

• LoopNet (11%) – CRE market websites for owners and brokers to advertise properties for sales and leases

• Residential (3%) – Homes.com, a homes-for-sale listings website, and Homesnap, a platform for estate agents to manage workflow and marketing campaigns

• Other Marketplaces (6%) – incudes websites such as Ten-X, an online auction platform for CRE, and Land.com, a rural land-for-sale site

CoStar had $2.18bn of revenues, making it several times larger than Rightmove, and $554m of EBIT in 2022. 96% of CoStar’s revenues were generated in the U.S.

We believe CoStar’s presence in the U.K. is minimal. It had only $76.4m of revenues outside the U.S. in 2022, spread across several countries (including France, Spain, Germany and the U.K.). Non-U.S. revenues were mostly in CoStar and Information Services, which means any U.K. presence will be tilted towards CRE and away from residential property.

CoStar’s Ambitions & Plans

CoStar has stated they want to make OnTheMarket the #1 player and will be aggressive in marketing spend.

CEO Andy Florance explicitly said they want to turn OnTheMarket into the #1 U.K. player on the Q3 2023 call:

“Our intention with the acquisition of OnTheMarket is to create the #1 property portal, by combining the strengths of our leading commercial U.K. commercial property site, CoStar, and our technology platform driving Homes.com, with OnTheMarket's large network of agents … We believe the acquisition of OnTheMarket represents an attractive and efficient entry point into the $8 trillion United Kingdom residential property market”.

How will CoStar achieve this? In addition to the technology and the CoStar commercial property site, Florance also indicated on the call they will be aggressive in marketing spend:

“We plan to invest £46.5 million into sales and marketing in the first full-year … That amount represents six times OnTheMarket's current annual media spend and more than three times the current annual media spend of Rightmove. The sales and marketing investments in the first stage of a multi-year investment program is to drive consumers to OnTheMarket portal.”

Other Florance comments highlighted Rightmove’s high EBIT margin and what he saw as historic under-investments into marketing by incumbent U.K. players:

“I tend not to assign god-like characteristics to mere companies. And when I see a 72%-74% margin in a company with none of the major players actually materially investing, in my view, into significant marketing in the market … I feel very comfortable we have something to bring to the table in the United Kingdom.”

Florance also expressed ambitions for the entire European market in the press release announcing the acquisition:

“We see OnTheMarket as an important step in expanding our Homes.com residential network not only in the UK, but across Europe. We believe the market opportunity in Europe is over $10 billion, and we intend to participate aggressively in developing and expanding our residential marketplace network.”

Given CoStar is interested in the whole of Europe as an opportunity, it is possible that they do not see the U.K. as a “must win” and will spread out their efforts across several countries, lowering their threat to Rightmove.

It is also worth noting CoStar has a $5.2bn gross cash balance ($4.2bn net, as of Q3 2023), the result of an unusual capital allocation policy where, in addition to starting 2020 with $1.07bn of cash and retaining all subsequent earnings, CoStar also issued $1.0bn of debt and $1.69bn of equity in 2020, and issued another $746m of equity in 2022:

CoStar Financing Cashflows & Cash Balances (2020-22)

Source: CoStar 10-K filing (2022).

It is unclear why CoStar is keeping this much cash. The company may want to have firepower for a large potential acquisition, and it did offer to acquire CoreLogic for $6.9bn in 2021 (but was ultimately outbid by private equity).

The £100m purchase price for OnTheMarket represented only a low-single-digit percentage of CoStar’s gross cash. It is possible that its small size means that the company viewed it as a relatively speculative endeavour.

Advantages of “Network Effect” and “Free”

We believe Rightmove will ultimately be successful in defending its market dominance in the U.K., thanks to the power of “network effect” and being “free” to end-users.

“Network effect” means every new participant on the Rightmove platform creates additional value for all participants on the platform. More potential house buyers begets more listings and more estate agents, etc.

With its dominant 85%+ share of time spent on platforms, Rightmove has the most views from potential buyers and is thus the most attractive portal for estate agents to list their properties. We believe Rightmove’s share of views is so large that estate agents generally find it necessary to list their properties there, because otherwise they will lose revenues.

According to Rightmove management, the average estate agent spends around 15% of their revenues on marketing, of which “half or less” is on Rightmove, i.e. about 7%. For most agents, it is unlikely to make sense to replace Rightmove with a cheaper (or even free) platform, because doing so will likely cost them much more than 7% of their revenues, given not being on Rightmove would make them uncompetitive in the eyes of house sellers (thus directly losing them business) or lower the eventual sale price (thus indirectly reducing their commissions).

Because Rightmove is “free” to potential house buyers, it will be hard for even a deep-pocketed competitor like CoStar to attack Rightmove’s dominant share of views, since they cannot make OnTheMarket cheaper than “free”. An aggressive marketing spend may raise OnTheMarket’s brand awareness, but Rightmove will remain the more attractive website for house buyers thanks to its much larger property listings. Search Engine Optimization or Direct Response ads will be limited in effectiveness, since 85% of traffic for the Rightmove website arrive directly. CoStar can try offering direct financial incentives to attract potential buyers, but this would be expensive.

For these reasons, we believe Rightmove will remain the first choice for substantially all its estate agent customers, with CoStar taking only some second listings, much like what OnTheMarket and Zoopla has done in the past.

Examples from Other Industries

Examples from other industries support our view.

Visa’s success in defending itself against Amazon’s threat to ban its U.K. credit cards in late 2021 is one example. As we argued at the time, Visa and Mastercard are businesses that enjoy strong “network effect”, and attempts to replace them tend to flounder on consumer choice, because where possible consumers will choose to use their Visa/Mastercard cards out of habit and for their superior features including card rewards. Amazon had threatened to stop accepting Visa credit cards on their U.K. site, but ultimately backed down, in our view because it would be too expensive – they would lose far more business than the 1-2% fee they save on Visa credit card fees.

The read-across here is that, even if estate agents list their properties on both OnTheMarket and Rightmove, most potential house buyers will still view them on the Rightmove site. And CoStar cannot take away this consumer choice by trying to get estate agents to only use OnTheMarket because it would cost them too much money.

Google’s continuing dominance share in Search, despite challenges by Microsoft’s Bing and others, is another example. Bing is certainly capable of providing links to all the same websites that Google provides in its search results. Bing can also offer advertisers cheaper rates than Google. However, because Google is already free, Bing cannot undercut it in price in the eyes of consumers, and Google Ads have good Return on Investment despite their higher prices. Google remains dominant in both consumer usage and advertising revenues.

The read-across here is that, even if OnTheMarket manages to procure the same depth and breadth of property listings from estate agents as Rightmove, it will be unable to undercut Rightmove in price in the eyes of consumers, and will likely remains smaller in market share than Rightmove.

Pre-Empting Low-End Competition

The biggest risk to Rightmove is probably at the low-end of the market.

Some estate agents will have revenues that are too low to justify buying any Rightmove products. CoStar can entice these estate agents by offering a low-price product, potentially at a loss. This may then start to make a dent in Rightmove’s dominance because it will no longer be clearly superior in the depth and breadth of its property listings.

Rightmove can pre-empt this by segmenting its products and prices, offering some low-cost packages to estate agents who otherwise cannot afford any Rightmove products, while still maximising overall revenues with price increases and package upgrades for customers who can pay.

Rightmove has in fact already been doing this, with 5 different package tiers for its estate agent customers at present, including the Essentials Extra tier created in H1 2023:

Rightmove Agency Customers by Package Tier (Since 2021)

Source: Rightmove results presentation (H1 2023).

In addition, Rightmove has also launched the Agent Accelerator product, which is priced per listing and is explicitly designed to allow new agents to stay in business, and to serve as a stepping stone to a normal package eventually.

However, Rightmove may have to moderate its pricing and invest more in the medium term, resulting in modestly slower earnings growth. We prefer management to prioritize fighting off the CoStar threat over short-term profits.

Rightmove Stock Valuation

At 473.6p, Rightmove shares are trading at a 19.3x P/E and a 5.0% Free Cash Flow Yield relative to 2022:

Rightmove Earnings, Cashflows & Valuation (2019-22)

Source: Rightmove company filings.

The Dividend Yield is 1.9%, based on a last-twelve-month dividend of 8.8p (3.6p 2023 interim, 5.2p 2022 final).

Rightmove has been actively repurchasing its shares. The average share count was down 2.5% year-on-year as of H1 2023, after buybacks. The latest basic share count is 806.3m.

Rightmove Return Forecasts

We have reduced our forecasts slightly to reflect lower revenue growth and higher costs. We have also reduced our exit P/E to reflect the continuing threat from CoStar. We now assume:

• Net Income to shrink 0.5% in 2023 (unchanged)

• Net Income to grow 7.0% from 2024 (was 8% in 2024 and 10% thereafter)

• Share count to fall by 2.5% annually (was 2.5% in 2023 and 2.0% thereafter)

• 2023 dividend of 9.1p (unchanged)

• Thereafter, dividends to be based on a 33.3% Payout Ratio (was 35%)

• 2025 year-end P/E of 25.0x (was 27.5x)

As discussed in previous articles, Rightmove’s revenue growth will be mostly driven by its core ARPA (from both price and mix), with the number of agents should grow slightly over time and newer business lines should make an increasing contribution from 2024. EBIT margin should contract slightly before stabilizing.

Our new 2026 EPS forecast is 32.0p, 5% lower than before (33.6p):

Illustrative Rightmove Returns

Source: Librarian Capital estimates.

With shares at 473.6p, we expect a total return of 75% (19.9% annualized) by 2026 year-end.

We reiterate our Buy rating on Rightmove.

Stock mentioned: RMV CSGP 0.00%↑. We are long Rightmove.

Disclaimer: This article consists of personal opinions, based on information believed to be correct at the time of writing, but not guaranteed. We undertake no responsibility in updating content in this article. Nothing published here should be taken as financial advice.