Could Rightmove make the wrong move?

Banks have been cutting fixed mortgage rates, leading to hopes among some people that the housing market – which has been pretty flat so far this year – will soon respond positively. While prices and sale volumes haven’t been going anywhere, last month the Royal Institution of Chartered Surveyors reported that enquiries from buyers have risen to their highest level in two years.

But do short sellers tell a different story? Property website Rightmove, according to a list maintained by the Financial Conduct Authority, is currently the fifth most-shorted stock on the FTSE all-share index, behind online grocer Ocado, retailers Kingfisher and Sainsbury’s and clothing-maker Burberry. There are four funds with a short position on Rightmove, owning around 3 per cent of the company’s shares. Housebuilder Barratt is also on the list of shares currently being shorted.

 Short-sellers don’t always get it right, of course. Many short bets end in failure, with the shorters nursing heavy losses and sending share prices flying as they scramble to close their positions, much to the joy of those who have bullish positions in the shares they have been shorting. But do the short sellers know something that the rest of us don’t?

Rightmove has proved to be a pretty resilient business in recent years. It was trading at 545p at the end of last week, a long way down from its peak on 799 p on 29 December 2021. But it is still up twofold over the past decade. A big attraction of the business is the dominant position it has managed to acquire in a market where the barriers to entry should be low. As purely an advertising platform, little capital is required and as a result it enjoys huge profit margins – in 2023, even during a housing downturn, it managed to make profits of £258 million on a turnover of £364 million.     The business is, however, quite highly valued, and many investors might find its dividend yield of 1.6 per cent a little measly.    

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But with an advertising business like Rightmove, its fortunes are not necessarily directly related to the health of the property market. Whether a house sells for £300,000 or £350,000 is of no concern to Rightmove. What matters is how many estate agents see the need to spend money to advertise on its platform.

Here is where it get interesting because the slower the market, the greater the need for advertising. This is especially true for developers, who have their own ‘new homes’ section of Rightmove. If the market were to pick up, developers may well feel that they didn’t need to spend quite so much on advertising and Rightmove could, counter-intuitively suffer.

The other factor in Rightmove’s fortunes is how secure is its brand name dominance. At the moment Rightmove is still the place to which I gravitate if I want to look at house prices. But that dominance can’t be guaranteed forever. The company will have to watch its back for app developers out to steal its business. The popularity of apps and social media platforms can often take established businesses and their customers by surprise as they tend to erupt among the young.    

Put that together and I am not minded to take the short-selling of Rightmove’s shares as a sign of coming problems in the housing market. Rather I think a few hedge funds have come to the conclusion that Rightmove has had everything its own way for a long time – and that might not last much longer.