Shares in Zoopla Property Group (LSE: ZPLA) fell this morning, after the firm admitted that the number of estate agents listing their properties for sale on the Zoopla website had fallen by 23% over the last year.
The cause of these desertions is the launch of a new website, OnTheMarket.com, which is backed by a group of large estate agents. In an effort to gain market share, OnTheMarket.com only allows advertisers to list their properties on one other website.
Given the choice between Zoopla and its market-leading peer, Rightmove (LSE: RMV), estate agents are abandoning Zoopla and choosing Rightmove, as you’d expect.
The question today is whether investors should do the same.
Financials are okay
Zoopla shares only fell by around 2.5% when markets opened this morning, probably because the firm’s operating profit rose by 12% to £18.2m during the first half of the current financial year, which ended in March.
The firm achieved this feat by extracting more money from each advertiser. The average monthly revenue per advertiser (ARPA) rose by 13% to £340 during the first half of this year.
Zoopla’s total sales were up 10% to £42m, while adjusted earnings per share rose 9% to 3.8p. This suggests to me that the current consensus forecast for full-year earnings of 7.3p per share is realistic and management confirmed today it expects to hit full-year expectations.
However, although Zoopla and Rightmove both trade on similar valuations, there are some big differences:
|
Rightmove |
Zoopla |
|
|
2015 forecast P/E |
28.5 |
30.7 |
|
2016 forecast P/E |
25.0 |
23.5 |
|
Operating margin |
73% |
36% |
|
Agency and developer advertiser change (last 12 months) |
+5% |
-19% |
Rightmove’s operating margin is twice as high as Zoopla’s, and the firm’s advertiser count has risen by 5% over the last year, while Zoopla’s has fallen by 19%.
These numbers suggest to me that Rightmove is a superior business.
Although Zoopla’s proposed acquisition of price comparison website uSwitch should add something to the firm’s profits, uSwitch is a second-tier player that’s only really big in the heavily-regulated utility sector. I don’t see this as a transformative deal.
A second test
Zoopla and OnTheMarket.com both claim decent coverage of the market, but how well is OnTheMarket.com doing?
I decided to carry out a simple test, searching for properties for sale in three residential locations I’m familiar with in different areas of the UK:
|
Number of results |
Zoopla |
OnTheMarket.com |
Rightmove |
|
Location 1 |
503 |
55 |
634 |
|
Location 2 |
370 |
348 |
753 |
|
Location 3 |
66 |
130 |
217 |
These results are not very scientific, but they suggest that Rightmove remains by far the most comprehensive set of listings.
Zoopla and OnTheMarket.com each appear do well in some areas but poorly in others. I suspect this is the result of a number of big agents leaving Zoopla and backing OnTheMarket.com.
The question now, which I cannot answer, is whether OnTheMarket.com can grow its web traffic to compete with the 265.5m visitors Zoopla received over the last six months.
A simple choice
In my view, the choice between Rightmove and Zoopla is an easy one.
Rightmove is the clear market leader. Profit growth may slow down, but Rightmove is unlikely to lose many advertisers as long as it remains the most-visited property website.
Estate agents cannot afford not to be seen on Rightmove, but they can take a chance and leave Zoopla. In my view, Zoopla’s valuation should be lower than Rightmove’s to reflect this risk, but it isn’t.
