Since listing in 2006, Rightmove (RMV) has generated more than a whopping 1,500 per cent return for investors at its high in February. But since then, the price has collapsed over 40 per cent. It’s a great business and has successfully fended off competition and criticism over the years, amply rewarding those that believed in the power of the network effect and operational gearing behind it. Right now, Rightmove faces some serious challenges, though, and ones that the share price is going to struggle to shake off.
In the boom years it’s been fantastically profitable, delivering a 513.3 per cent return on capital employed (ROCE) in 2019, according to SharePad, and pumping out £213.6m in pre-tax profit. Unfortunately, even with a business as seemingly robust as Rightmove hasn’t been able to avoid the stock price dynamite that has come in the form of Covid-19.
Last Friday, prime minister Boris Johnson announced the closure or all pubs, cafes and restaurants, and urged people to stay indoors. Many foolishly decided to ignore this advice – the seaside where I live was rammed with people queuing in close proximity for a fish and chip supper. Smiles were aplenty, but nobody will be smiling should the death rate start ratcheting up if the spread of the virus can’t be slowed.
Whereas the R0 (the infection rate used by epidemiologists) is still not known, what is known is that slowing the spread is needed in order to prevent NHS overload. Because of this, and the lack of common sense on display across the UK’s parks and beaches, on Monday evening the government announced a full UK lockdown, in which only essential retailers are allowed to open. Estate agents were not in that list.
That means people certainly won’t be going around strangers’ houses to view properties. Already, vendors are worried about having nowhere to live if they do sell. Buyers are worried about not having the money to fund a mortgage. Chains are grinding to a halt. Eventually, this will pass, as it must, but at the moment there seems little end in sight.
But Rightmove had already been having problems. Over 600 agents had signed up to the Say No to Rightmove campaign, which was then pulled when a 75 per cent reduction in fees was introduced on Friday last week. This is for the next four months. What if it’s longer, though? The impact on profits is already estimated to be in the region of £65m-£75m. At the current price of 400p, Rightmove is trading at 20 times earnings. That’s a high price to pay for a company that is going to see its earnings significantly reduced, and any earnings downgrades only further increases the forward price/earnings ratio – showing the company to be valued on an even higher rating even as trading is worsening.
And that’s not all, either. The property portals are going to war. Zoopla –taken over by American private equity firm Silver Lake partners for $2.2bn (£1.87bn) in 2018 – has declared that its portal will be free of charge for agents with fewer than 30 branches (which comprise 80 per cent of its client base) for five months, and nine months if the agent leaves Rightmove. The hope here is that once the free period ends, the estate agent will sign an 18-month contract with Zoopla afterwards, and the normal fees are resumed.
In a race to the bottom, the last person standing is the winner. The problem with discounting, as Restaurant Group (RTN) found to its dismay, is that if you offer too many discounts it becomes hard to wean your customers off them, especially if everyone is offering them. Why pay full price, if you know there’s a cheaper deal available?
What are the charts telling us? In this case, that until Covid-19 blew it up the momentum looked unshakeable.
In chart 1, we can see Rightmove’s stock price from the summer of 2018 until February 2020. The stock put in a triple bottom around 415p, which we can mark as significant support. Remember, the more a support zone is tested the more significant it becomes when that marker is breached. Rightmove then tested the 200 day moving averages, but confirmed the uptrend and continued to rise.
1. Rightmove tests 200-day moving average
Then came Covid-19. In chart 2, we can see the price fall off a cliff. Already the price is 40 per cent down from its highs, but there’s no reason why it can’t fall more. It’s possible that the previous support zone at 415p may come into play. If it does, I would want to increase my short here as I am already short from 400p. If the price takes out this level, then I’d close the trade around 420p-425p and look to re-enter around 400p. I don’t mind taking a few small hits, because when I’m right my wins far outweigh the small losing trades.
2. Covid-19 hit Rightmove
I think I will be; although we may see a brief respite in stock prices as there must be an eventual technical bounce, my belief is that long-term investors have not seen the broader markets bottom just yet – and for traders, increased volatility means more trading opportunities.
Back in 2008, when Lehman Brothers collapsed, the FTSE 100 didn’t bottom until March 2009 – six months later. It could be different this time, as we are seeing the money tap flowing freely, and interest rates lowered to 0.1 per cent by the Bank of England, but we are not at Peak Fear yet. If we were, then people would stay inside.
Nothing can be quantified at this stage, and I personally do not think it’s unreasonable to assume more rate reductions will come from the property portals. I believe that Rightmove will be an eventual winner in this market, especially against feeble competition such as OnTheMarket (OTMP) – with its dilutive business model I think it will be hard for it to survive, although it could still do some damage to the market before it disappears. And even if Rightmove turns out be the winner, it is likely that there will be plenty of ups and downs on the way to finding its eventual bottom.
Michael Taylor holds a short position in Rightmove.
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