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Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
Rightmove has proved to be a thoroughly disappointing tip. The online property portal’s share price has risen by just 14pc since our initial buy recommendation all the way back in October 2019. This represents a modest seven percentage point outperformance of the FTSE 100 index, of which the firm is a member.
A tough operating environment has, of course, contributed to the stock’s lacklustre performance. A restrictive monetary policy implemented in response to rampant inflation has made property far less affordable over recent years. This has weighed on the number of housing transactions, thereby putting pressure on the financial performance of the estate agents and housing developers on which the firm relies.
Now, though, there are signs that the property market is in the midst of a rebound.
Residential property transactions in the 10 months to February this year, for example, are up 15pc versus the same period of the prior year. Although they are still around 4pc below pre-pandemic levels, further increases are likely to be ahead over the coming years.
Crucially, inflation is set to return to the Bank of England’s 2pc target over the medium term. This should provide scope for further interest rate cuts that gradually make property more affordable. When combined with the positive impact on wages that typically follows a period of sustained monetary policy easing, as well as a moderation of cost of living woes as inflation subsides, this should mean that demand for property increases.
Given Rightmove’s extremely dominant market position, it is well placed to benefit from rising transaction volumes. Indeed, more than 80pc of all visits to property portals during 2024 were to its website. This provides it with a significant amount of pricing power, since estate agents and developers who are unwilling to pay for its variety of products and services, have limited alternatives.
The company’s strong competitive position contributed to a 7pc increase in average revenue per advertiser in its latest financial year. Although this did not translate into a particularly strong growth rate in earnings, with profits rising by just 4pc on a per-share basis, the firm is forecast to post a 12pc annualised increase in its bottom line over the next two years as market conditions improve.
A double-digit forecast rise in earnings helps to justify what is undoubtedly a lofty market valuation, with Rightmove’s shares currently trading on a price-to-earnings ratio of 26.