Stockwatch: a FTSE 100 recovery buy or falling growth star?

A slump in the FTSE 100 shares of Rightmove (LSE:RMV), the online portal for property sales and lettings, has divided investors.

Does its declaration about raised artificial intelligence (AI) spending offer long-term value, hence “buy the drop”, or might it represent the essential investment Rightmove has to make in a shifting world, just to stand still competitively?

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Rightmove enjoys a market share of 70% or more, whether assessed in terms of eyeball time searching or subsequent transactions. Zoopla has 20% or so, with OnTheMarket third but growing fastest. Various others are getting more attention such as Facebook Marketplace but, as to whether AI is about to displace Rightmove, if you ask Google AI for specific listings it still defaults to the major portals then active local estate agents.

I notice increasingly how OnTheMarket can be first to feature a new listing, but in terms of the most comprehensive overview of an area, anyone serious about a property search still most likely defaults to Rightmove.

In such context, Rightmove management speaks of AI helping to create “a larger, more diversified, digital ecosystem in line with our strategy”. This investment is said to be likely to temper underlying operating profit growth to 3-5% in 2026, a downgrade on recent consensus, with revenue growth staying around 8-10%.

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As it continues, 2026-28 may see variance in underlying profit growth from 3% to 10% or 5% to 12% in terms of earnings per share (EPS). This represents “forward-looking ambition” rather than guidance, with a carrot extended so that EPS growth could reach 15% or greater by 2030.

With a current share price of 563p representing a forward price/earnings (PE) ratio perhaps, at best, in the high teens, it initially suggests to me that there is no hurry here.

Chart context has useful lesson about ‘bowl’ patterns

After floating as a circa £500 million company in 2006, Rightmove rose then fell with the 2008 crisis impacting property, but which helped set up a splendid bull run from about 20p to 778p by the end of 2021.

There then followed a classic “bowl” chart pattern with two 470p lows before the shares picked up in August 2024, helped by a possible 749p cash and shares offer from REA Group Ltd (ASX:REA), an Australia-listed and Murdoch family-controlled group of property websites.

Source: TradingView. Past performance is not a guide to future performance.

I last wrote on Rightmove in September 2024 with a “sell” stance at 685p given that the shares seemed exposed to a high PE once the prop of a possible offer went away.

Some investors cling to that 749p offer value as if it’s some kind of fair-value benchmark, but it likely included synergistic benefits that REA thought it could achieve. They might take another look but I am sceptical that they’ll offer again, certainly near-term.

In terms of the validity of bowl patterns – especially on a capital protection view – this one has been quite a disaster given the plunge from above 800p in August to 563p currently. Overall, this looks like a volatile-sideways share, nothing like its previous bull run. It effectively shows the market struggling to re-price this share from a big PE – ranging up to 30x – versus earnings growth realities.

What price for high operating margins and return on capital?

The seven-year table below shows a margin around 70%, which management reiterates for 2025 on an underlying basis, and return on capital roughly 300%. Any such share is likely to attract some premium to earnings growth. But while 69% EPS growth was achieved in 2021, that was from the Covid low and was only 9% higher than 2019. Otherwise, Rightmove hardly looks to justify a classic growth PE around 20x compared with about 30x at the August high.   

Rightmove - financial summary
Year-end 31 Dec

Source: company accounts.

A very strong free cash flow profile, with zilch capital expenditure until now, has enabled over 50% dividend growth since 2018, plus buybacks. However, even after this share drop the prospective yield is likely only about 2%. Rightmove is between two stools, of no special appeal to income investors, while a meaningful growth narrative looks like taking a few years to prove.

While I respect Rightmove’s margin, it also follows from a “capital light” business model without recourse to debt. If the business is effectively in a consolidation and regenerative phase, I am unconvinced high margin necessarily justifies a premium rating. While Rightmove has a dominant market position, it is not exactly a “moat”.

Budget looks a significant influence on housing activity

Rightmove’s interim results to 30 June cited “supportive market trends for our partners’ businesses”, although listings and transactions in UK residential property appear generally sluggish to me. Management also noted market expectations of “further cuts to base interest rates by the year-end” as aiding the housing market.

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With inflation still a nuisance, I think rate cuts will be more a function of whether the economy deteriorates as a result of current uncertainty over the Budget, and its aftermath in terms of a mix of higher taxes and spending cuts. The overall upshot doesn’t exactly look bullish for wanting to move house.

Tuesday morning heralds news of UK unemployment at a four-year high of 5%, as hiring slows, which is likely to sustain rate-cut hopes. 

On the fringe of FTSE 100 inclusion

Rightmove’s current valuation is £4.3 billion, same as Burberry Group (LSE:BRBY) at 1,180p, which entered the blue-chip index last September, so shareholders can feel comfortable about this technical market issue right now. It would have to lose almost £1 billion of its current value to face relegation.

Such a matter is worth being aware of in a near-term technical context, especially in big liquid stocks, as hedge funds and similar may be more inclined to trade (either way) if blue-chip status coincides with their view on fundamentals. The FTSE 100 also seems more relevant due to the extent of tracker funds having to buy or sell.

The only short seller disclosed over 0.5% of Rightmove’s issued share capital is Kintbury Capital at 0.67%, having raised the trade 0.13% astutely on 5 November. That is a circa £29 million bet, as if there’s conviction that risk outweighs reward still. Kintbury’s other short positions as of 6 November are BT Group (LSE:BT.A) up 0.13% to 0.5% – an even bigger bet on a near £18 billion company – Howden Joinery Group (LSE:HWDN) up 0.13% at 0.63%, and WPP (LSE:WPP), which edged up 0.05% to 0.7% on 13 October.

After setting up in 2015, Kintbury made nearly £22 million pre-tax profit in its year to March 2025, according to accounts filed to Companies House last September. It looks to me the kind of long/short operator useful to be aware of when weighing up a share (and why it is bad how the Financial Conduct Authority is doing away with such disclosure). Do I have a more convincing bull case to counter this bear? As yet, no.  

Rightmove thus falls into a wishy-washy “hold” category or “one to watch”, where this analyst can be humiliated either way – possibly on the upside on a multi-year view but also downside in the short to medium term.

I am inclined to suggest holders take care, more than I want to flag a potential “buy”.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.