FTSE 100 tech group Rightmove (LSE: RMV) has conquered a small section of the online world in a very short space of time. Online property portals didn’t really exist 15 years ago. However, viewing property digitally has become a significant business in recent years. Rightmove is now one of the UK’s most popular websites.
The company’s growth has been staggering since inception. Incorporated in 2007, Rightmove has since become the 42nd most popular digital service in the UK today, attracting around 130m visits to its sites every month. It’s more popular than the BBC News website and iTunes.
Rising customer numbers have helped the company’s profits surge. Over the past six years alone, Rightmove’s earnings per share have grown at a compound annual rate of nearly 20%.
More importantly for investors, the stock price has charged higher. Over the past decade, shares in Rightmove have returned around 31% per annum, turning every £1,000 invested into £14,000.
This trend seems likely to continue because Rightmove has the first-mover advantage in its market. You see, because the firm is the largest property portal in the UK, and virtually everyone knows of it and how to access its website, it would be almost impossible for a competitor to take over. Indeed, a whole range of competitors has tried. Most have failed.
Zoopla is its nearest challenger, attracting around 50m visitors per month to its websites. But that’s less than half the number of visitors that view Rightmove’s offering.
That said, the one weak point in the Rightmove business model is that it doesn’t sell properties. It relies on agents to pay a fee to list on its platform. If these agents stop paying the company for its services, earnings will slump.
However, agents are unlikely to turn their backs on the company while it remains the UK’s top property website. And, as mentioned, with the closest competitor not even halfway to overtaking Rightmove, it doesn’t look as if this will happen any time soon.
Therefore, it looks as if this investment can continue to produce healthy returns for investors for many years to come. The stock is currently trading at a price-to-earnings ratio of 33.8, which looks expensive. Nevertheless, considering Rightmove’s competitive advantage, long-term growth, and operating profit margin of 73%, this seems to be an appropriate valuation for the high-growth tech business.
In addition to all of the above, the company is also highly cash generative. At the end of its last financial period, it reported a net cash balance of £42m. Management is returning this cash to investors with share buybacks and dividends. The dividends yield currently stands at 1.1% and, over the past six years, Rightmove has repurchased 10% of its outstanding shares.
These buybacks have helped turbocharge earnings growth. As cash continues to flow into the group’s coffers, further returns are likely. This only increases the appeal of the company and help justify that high valuation.
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Rupert Hargreaves owns no share 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.