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Why I’d sell On The Market Property right now

On The Market Property (LSE: OTMP) was billed as ‘the next Rightmove‘ as it was set up by estate agents in an attempt to fight the online behemoth. However, as the company approaches its second year of listing, On The Market Property has yet to deliver a shred of value. 

In the company’s interim results announced in October 2019, On The Market Property described how the number of branches was up 28% in the year and how a growth in traffic had lead to a 75% increase in the number of site visits.

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However, when it came to leads, the company has disappointed compared to Rightmove. But that could be just because Rightmove is much more expensive. It makes sense that spending more is likely to generate more leads; therefore, we would need to work out the cost per lead to determine the quality. 

Negative self-fulfilling prophecy

One of the reasons I feel this stock is one to avoid is because of its business model. The company wanted to compete with Rightmove in the online housing market, and to incentivise estate agents to sign up, the company gives away shares in the business to those estate agents who joined. 

This means that the more estate agents sign up, the more dilution there will be. Dilution is important because the number of shares in a business is crucial – anyone who is a current shareholder sees their percentage ownership in the business diluted when new shares are issued. As the price gets lower and lower, more and more shares need to be issued to the estate agents that sign up. It’s a negative cycle of destruction!

Cash position is weak

One of the most important factors in an unprofitable/growth business is the cash balance. This is because when a company is investing for growth, it usually relies on a series of fund raises from investors in order to keep the lights on and invest in the hope that one day the company will turn a profit.

But the cash balance at the end of September was £8.6 million. The company made a loss of just under £7 million in the six months ending 31 July 2019, and they burned through over £6.5 million in operational and investing activities, which we can see on the cash flow statements.

If we do the maths, then it doesn’t take a genius to see that the company is likely going to be out of cash by the end of March. That means another fund raise – and these fund raises are rarely at a premium to the current price.

Rightmove can see off this threat 

It seems to me that Rightmove just needs to lower its prices a little in order to strangle On The Market Property into submission. The company is the market leader, and I don’t think it will be feeling challenged by this estate agent-founded competitor anytime soon.

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Michael Taylor does not hold any position in On The Market Property or Rightmove. 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.