The Rightmove (LSE:RMV) share price fell sharply after the release of its 2023 earnings. Despite growth in revenue and profits, the market wasn’t impressed.
In terms of financial metrics, I thought the report looked okay, but I don’t think that’s the biggest issue at the moment. The key question, in my view, is the company’s ability to fend off competition.
Earnings
During 2023, Rightmove’s revenues increased by 10% to £364.3m and earnings per share grew 5% to 24.5p. Given the state of the housing market last year, I think that’s a decent result.
In my view, though, the most important number from the company’s report was 18,785. That’s the site’s total membership, which was down 1% from 19,014 in 2022.
It’s no secret that the business has some impressive economic characteristics. The biggest question at the moment is whether or not it can withstand increased competition.
With US firm CoStar looking to compete in the UK, Rightmove’s ability to retain its customers is going to be tested. And the membership metrics are one of the best ways of monitoring this.
Competition
CoStar is about seven times the size of Rightmove and is prepared to spend significantly to try and take part of the UK market. But the FTSE 100 company’s entrenched position gives it a big advantage.
Buyers go to Rightmove because that’s where the most houses are advertised. And sellers list their properties on the site because it’s where people look for houses to buy.
While this remains the case, I think the outlook is bright for Rightmove. But a reduction in membership numbers is something for investors to keep an eye on.
As the business loses members, the value declines for both buyers and sellers. While a 1% drop is probably not a major issue, I think this is going to be important as the competitive landscape intensifies.
Valuation
From a valuation perspective, the picture looks somewhat mixed. At first sight, the stock looks expensive at the moment, but on closer inspection this might not be the case.
Even after a recent fall, the stock trades at a price-to-earnings (P/E) ratio of around 22. This looks high, especially compared to the rest of the FTSE 100.
Arguably, though, Rightmove isn’t like other Footsie companies. The firm’s low capital requirements means it was able to return £201.7m in cash to shareholders last year through dividends and share buybacks.
At today’s prices, that’s a 4.5% return, which is significant even with interest rates where they are. And if the company can keep that going, the stock doesn’t look hugely expensive.
A stock to consider buying?
That’s the big question for investors to consider – can those returns keep coming? A lot depends, on my view, on Rightmove’s ability to maintain its dominant market position.
The firm has never faced a competitive threat like the one that’s coming from CoStar. That makes me uncertain enough to stay on the sidelines for now, but if the price falls further, I might think the risk is worth considering.
