Rightmove: great stock, but here’s why I’m not buying right now

Rightmove stock fell 7% after reporting earnings for FY2020. Was this move justified? Ollie Henry reviews the investment case for Rightmove stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last Friday (26th February) Rightmove (LSE: RMV), the UK’s most popular online property advertising platform, reported earnings for FY2020. At first glance earnings looked fairly disastrous, with revenue and operating profit falling 29% and 37% respectively. Investors reacted negatively to the news, with the company’s share price declining nearly 7% in the immediate aftermath. In the last few days, Rightmove stock has recovered some of its losses, rising over 3%. However, at a share price of 584p at the time of writing, its shares are still down 10% year-to-date.

Is it really that bad?

While the headline figures certainly make for bad reading, there are several reasons to be optimistic about Rightmove stock. One reason is that FY2020 earnings were not as bad as the headline figures suggest. From April to July 2020, Rightmove offered agents and new home developers advertising on its platform a discount of 75%. This was reduced to 60% and 40% in August and September respectively. As the figure below demonstrates, this was the primary reason for the reduction in revenues in 2020. In fact, without the discount, Rightmove stock would have grown revenues in 2020.

Source: Rightmove Full Year Results 2020 Presentation

There were other positives regarding performance in 2020. Traffic to Rightmove’s platform grew substantially during the period, up 31% from the previous year as lockdown accelerated the trend of property advertising moving online. The number of advertisers on its platform also remained steady, only falling 3% during the period and, if one adjusts for the discount, average revenue per advertiser (ARPA) actually grew during the year as more advertisers upgraded to Rightmove’s premium packages.

Another reason to be optimistic about Rightmove stock is its strong fundamentals. With a market share of over 80%, the firm has a strong position in its market. This has allowed Rightmove to maintain very high margins with operating and net profit margins averaging 72% and 58% respectively over the last five years.

As mentioned, Rightmove is also benefiting from a long-term trend of property advertising moving away from brick and mortar sites to online platforms. This, coupled with its strong competitive position, has enabled the company to grow substantially and consistently. Over the five years before the Covid-19 pandemic, Rightmove’s revenues and net profits grew at an annual rate of 11.6% and 12.3% respectively.

Looking forward, the future for Rightmove looks bright. Not only is the trend towards online property adverting a major catalyst for future growth, but now that the discount has been removed, the company looks set for a swift recovery in 2021. Indeed, management stated that they expect to see financials return towards 2019 levels in 2021.

Am I buying Rightmove stock?

Although I think Rightmove is a great company, the price at which it is trading currently is too expensive for me. At the time of writing, the price to earnings (P/E) ratio of Rightmove stock stands at 46. Even if earnings recover to 2019 levels in 2021, this would still give the company a P/E ratio of 30 in one year. This is too high for me. As a result, I am going to wait for the are price to pull back further before jumping in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ollie Henry has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »