UK stocks often trade at lower multiples than their S&P 500 counterparts. But few come with more attractive attributes than Rightmove (LSE:RMV).
The stock is down 44% from its 52-week highs and I’ve been wary of the way things have been developing. The firm’s latest results, however, have caused me to take a second look…
An unusually good business at a low price
Strip out the share-price wobble and the numbers behind Rightmove’s business are hard to argue with:
- Dominant market position: 85% share of UK property portal traffic.
- Asset-light model: £241m in annual operating income generated by £34m in fixed tangible assets.
- High cash conversion: 98% of cash from operations converts to free cash flow.
These are extremely rare – and extremely valuable attributes. And it’s important not to underestimate how important they are for investors.
On top of this, finding them at a price-to-earnings (P/E) ratio around 16 is extremely rare. The stock has historically traded at a multiple closer to 30.
The market sees artificial intelligence (AI) as a threat to Rightmove’s business – and until recently, so did I. But I’m starting to wonder whether I might have overestimated the magnitude of the threat.
Rightmove’s AI
The potential threat has two faces. One is the danger of the likes of ChatGPT replacing the platform as a way of searching for properties.
Rightmove’s response has been to invest heavily in its AI solutions. It has valuable proprietary data that ordinary LLMs don’t have, but this comes with a catch.
Spending £60m on AI creates a danger of turning a capital-light business into one with big investment needs. And management’s guidance for the next few years reflects this.
In other words, Rightmove is fighting a defensive war with its chequebook and that’s made me wary. But the firm’s H1 numbers suggest the spending is earning its keep.
It seems to be working…
According to the latest results, Rightmove now runs 46 strategic AI initiatives. Importantly, they seem to be generating meaningful growth for the firm.
Management says that early results show a 40% uplift in the average time customers spend on their site. Importantly, the propensity to send agents a lead has also roughly doubled.
Even more importantly, traffic coming from OpenAI’s own chatbot has been relatively limited. That suggests customers aren’t looking elsewhere in any meaningful numbers.
That causes me to think that the firm’s competitive position might be stronger than I anticipated. Analysts remain divided, but I’m starting to become more bullish.
Time for a rethink
I’ve been firmly wait-and-see on Rightmove. A low-capex grower that suddenly needs to spend heavily changes the maths behind the investment thesis.
It seems, however, that the company’s network effect hasn’t gone anywhere and 5.5% mortgage rates haven’t really dented margins.
On top of this, the early AI metrics are genuinely encouraging. With the stock still down 44% from its highs, this looks like one for me to think about buying this August.
Should you invest £5,000 in Rightmove Plc right now?
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Stephen Wright does not own shares in any of the companies mentioned.
This story originally appeared on Motley Fool
