Optimiser Edge And AI Will Drive Future Product Innovation

Key Takeaways

• Increased investment in AI and tailored products is expected to drive future revenue growth and enhance net margins.
  
• Diversified growth strategy focusing on strategic areas aims to increase revenue and provide resilience against market fluctuations.
  
• Challenging market conditions, high mortgage rates, and investment costs pressure Rightmove's revenue, earnings, margins, and customer retention.

Catalysts

Operates online digital property advertising and information portals in the United Kingdom and internationally.

• Rightmove's increased investment in AI-enabled product teams and the launch of new and U.K.-tailored products are expected to drive future revenue growth and potentially enhance net margins through innovation and efficiency.
  
• Their expanded growth strategy with a focus on data-backed product innovation is anticipated to diversify revenue streams, providing resilience against market fluctuations.
  
• The successful rollout of the Optimiser Edge package and expectation of further ARPA (Average Revenue Per Advertiser) growth from product upgrades indicate a strong pathway to increase revenue and earnings.
  
• Rightmove's significant consumer engagement and brand loyalty allow the company to leverage these assets for increasing revenue by offering targeted, data-driven services to agents and advertisers.
  
• The strategic growth areas, including commercial, mortgages, and rental services, are on track to grow faster than the core business, thereby expected to contribute significantly to revenue and profit growth over time.

Rightmove Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rightmove's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 49.4% today to 51.0% in 3 years time.
• Analysts expect earnings to reach £258.6 million (and earnings per share of £0.36) by about March 2028, up from £192.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.0x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the GB Interactive Media and Services industry at 25.1x.
• Analysts expect the number of shares outstanding to decline by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Rightmove Future Earnings Per Share Growth

Risks

• Market conditions in the new homes sector have been challenging, with a decline in developments impacting revenue by £2.9 million. This market volatility could continue to suppress revenue growth if conditions do not improve. [Impacts revenue]
  
• Rental market conditions show an imbalance, with reduced demand and increased supply leading to only incremental improvements. This could lead to a slowdown in growth for Rightmove’s letting services, potentially affecting revenue. [Impacts revenue]
  
• High mortgage rates remain a significant concern, as they have historically impacted property market activities. Although there is optimism for lower rates, any delay or reversal in rate trends could negatively affect property transactions and related revenues. [Impacts earnings]
  
• Although Rightmove has noted strong product adoption and price increases, they have faced criticism from some customers regarding pricing practices, potentially leading to customer dissatisfaction or loss. This could impact net margins and customer retention. [Impacts net margins]
  
• Increased costs related to investment in new sectors and strategic growth areas may not immediately translate into proportional revenue growth, particularly if competitive or market conditions change. If these investments do not yield the expected returns, it could pressure earnings and margins. [Impacts earnings and net margins]

Valuation

• The analysts have a consensus price target of £6.772 for Rightmove based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £8.35, and the most bearish reporting a price target of just £4.95.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £507.0 million, earnings will come to £258.6 million, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of £6.71, the analyst price target of £6.77 is 0.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.