Digital network companies Rightmove (LSE: RMV), Just Eat (LSE: JE) and Moneysupermarket (LSE: MONY) are delivering tremendous numbers of online eyeballs for businesses. But can they deliver tremendous returns for investors?
As the turnover growth numbers in the table below show, these three companies are certainly pulling in revenue hand over fist.
| 2010 | 2011 | 2012 | 2013 | 2014 forecast | |
| Moneysupermarket | £148.9m (+9%) | £181.1m (+22%) | £204.8m (+13%) | £225.6m (+10%) | £243.7m (+8%) |
| Rightmove | £81.6m (+26%) | £97.0m (+19%) | £119.4m (+23%) | £139.4m (+17%) | £163.6m (+17%) |
| Just Eat | £?m (+?%) | £33.8m (+?%) | £59.8m (+77%) | £96.8m (+62%) | £148.9m (+54%) |
All three companies were established around the turn of the millennium, and are the leaders in their markets.
Price comparison website Moneysupermarket gets its revenue mainly from fees paid by product providers when a customer clicks through to their website and purchases a product. Revenue growth is very decent but not spectacular.
Online property portal Rightmove gets most of its revenue from monthly subscriptions paid by estate agents to advertise properties on its website. A backdrop of advertising spend continuing to migrate from local print media to online portals should be a driver for further strong growth in Rightmove’s revenue.
Revenue for online takeaway ordering service Just Eat comes mainly from commissions charged to restaurants on the value of orders placed by hungry punters. Just Eat’s revenue growth is spectacular as it extends its UK land grab internationally with the aid of a £150m war chest.
Profitability and valuation
Impressive top-line expansion is the raw material of a growth company, but we also need to look at profitability, and, of course, the valuation at which the stock is being offered to us in the market.
| Moneysupermarket | Rightmove | Just Eat | |
| Recent share price | 225p | 2,176p | 307p |
| P/E | 20x | 24x | 85x |
| EV/EBITDA | 14x | 19x | 57x |
| EBITDA margin | 37% | 73% | 23% |
As far as profitability is concerned, Rightmove leaps out with a hugely impressive EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 73%. Just Eat’s margin is dragged down by early-stage losses in new territories, but in its established markets, the margin is around 40%; so, in the same ballpark as Moneysupermarket.
As far as valuation is concerned, Just Eat screams out with a stratospheric P/E of 85. Even on an EV (enterprise value)/EBITDA basis — which, unlike the P/E, credits the company’s chunky cash pile — we’re still looking at an eye-popping valuation.
Moneysupermarket and Rightmove aren’t too far away from each other on valuation. You have to pay a bit more for Rightmove, but I think it’s probably worth it for the property group’s higher growth prospects and outstanding margins.
What of Just Eat? Well, this company has international markets to go for and a cash pile to do so, good scope for improving its margins over time, and a healthy cash flow dynamic of collecting gross order values ahead of making twice monthly net payments to the restaurants.
Just Eat is on a super-high rating for its potential super-high reward. Not my cup of tea, but if I did want to have a little punt in the nosebleed valuation area, Just Eat would appeal more to me than a company such as AO World, the white goods online retailer, which trades on a similar sky-high EV/EBITDA.
