Will Zoopla Property Group plc beat Rightmove plc after sales rise by 84%?
Today's results from Zoopla(LSE: ZPLA) show that it enjoyed a positive year, with the company's sales rising by 84%. Its offering has been diversified thanks to M&A activity, while it has not yet felt any ill-effects of Brexit. As such, guidance for the full year has been maintained. However, is it a better buy than Rightmove(LSE: RMV), given the uncertain outlook for the UK property market?
Zoopla's plan to become a resource not just for moving home, but in managing the home, is working well. The acquisition during the year of Property Software Group has created the UK's only end-to-end solution for property professionals. Alongside its acquisition of uSwitch, this helps to reposition Zoopla as a better diversified business which is arguably better able to cope with a challenging period for the housing market.
uSwitch could become increasingly popular among consumers due to the potentially negative impact of Brexit. Higher rates of inflation are forecast and this could squeeze disposable incomes. As such, consumers may seek to lower energy, broadband and other home costs, with uSwitch being well-placed to capitalise.
Zoopla's sales growth pushed its adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) up by 58%. It is forecast to record a rise in its bottom line of 15% in the current year. When combined with a price-to-earnings (P/E) ratio of 27.5, this puts the company on a price-to-earnings growth (PEG) ratio of 1.8. Given the long term growth potential of the business in terms of further diversification and more M&A prospects, this seems to be a fair price to pay.
However, in the short run the UK property market could endure a challenging period. Once Brexit talks commence, uncertainty is likely to build as the UK and EU may find it difficult to agree on key issues such as freedom of movement and access to the single market. This could cause a delay in investment in not just UK property, but in the wider economy. Therefore, the performance of property-focused stocks could disappoint in the short run.
Due to this, having a wide margin of safety could prove to be crucial. In this respect, Rightmove(LSE: RMV) lacks appeal at the present time since it trades on a P/E ratio of 27.2 and yet is forecast to increase its earnings by 11% next year. This equates to a PEG ratio of 2.5, which indicates that the stock is overvalued given the uncertain outlook which it faces.
Therefore, Zoopla appears to offer better value for money than Rightmove. It could fail to outperform the wider index in the short run, but since the long term outlook for UK property is bright in terms of demand being well ahead of supply, it is likely to deliver capital gains in the long run. Furthermore, its strategy to diversify away from property and towards being a consumer champion via uSwitch is likely to not only offer higher growth, but also reduce its risk profile.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.