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3 Reasons Why Rightmove Plc Could Be The Next Internet Stock To Crash

Rightmove (LSE: RMV) shares fell by nearly 3% on Wednesday, following news that the firm’s chairman, Scott Forbes, has sold almost half of his shares in the company, netting himself around £7m.

Although the sale is believed to be for personal reasons, a trend is beginning to form: in November, Mr Forbes cashed stock options housesworth £3.6m, while in October, the firm’s chief executive, Nick McKittrick, raised £6.6m by selling some of his Rightmove shares.

Rightmove’s fat profits and strong growth have protected it from this year’s sell-off of internet stocks, but I believe the property website’s valuation could soon start to come under pressure.

1. Unsupportable profits?

Rightmove reported an underlying operating margin of 74.3% in 2013. That’s an incredible level of profitability — Rightmove is basically charging through the nose for a service that costs very little to supply.

The reason Rightmove can do this is that it has the lion’s share of the market; if your property isn’t listed on Rightmove, many people won’t see it. However, things can change fast online, and exceptionally high profit margins such as these are rarely sustainable in the long term.

2. Tougher competition

Rightmove and the UK’s number two property website, Zoopla, (part-owned by Daily Mail and General Trust (LSE: DMGT) and estate agent Countrywide (LSE: CWD)), currently enjoy a profitable and somewhat cosy stranglehold on the market.

However, this could change next year. London’s six largest estate agents, disillusioned with Rightmove’s high prices, are planning to launch a competing website, Agents Mutual, in January.

Agents Mutual plans to restrict the number of competing website on which members can list their properties, forcing estate agents to choose between Zoopla and Rightmove. According to The Guardian, Agents Mutual already has firm commitments from estate agents representing 12% of properties on the market.

This could threaten the key benefit provided by Rightmove and Zoopla: their comprehensive market coverage. Both websites are likely to fight to maintain this advantage, which could force Rightmove to cut its prices.

3. Is the house market slowing?

The latest figures from the British Bankers’ Association showed that the number of mortgage approvals fell by 6.4% in April.

If this trend continues, it’s not clear to me how Rightmove will deliver on consensus forecasts for earnings growth of 25% this year.

However, what is clear that Rightmove currently trades on 31 times last year’s earnings — any disappointments could hit the firm’s share price hard.

A better alternative?

Rightmove is definitely not a stock I would want to purchase at the tail end of a housing boom and a five-year bull market.

However, the Motley Fool's expert analysts have identified three stocks that could benefit from the economic recovery, including a property investment that looks cheap following recent transactions.

You can find all the details in the team's latest 'must-read' report, "Here's What The Smart Money Is Buying In 2014". To receive your copy of this free, no-obligation report today, simply click here now.

Roland does not own shares in any of the companies mentioned in this article.