Rightmove, Betfair and Autotrader are three internet stocks that will make huge gains over the medium term, according to AXA’s Nigel Thomas, who says their share prices can rise despite a likely five years of choppy markets.
The manager (pictured) of the £4.5bn AXA Framlington UK Select Opportunities fund says stock markets are at risk from the current falls in the bond market as well as its boom from the nadir of the financial crisis.
However, Thomas says a secular trend of online firms uprooting stalwart industry leaders can negate any price pressure.
“The internet is changing corporate architecture. For many, where you do not need retail outlets, offices or trade counters, then less fixed and working capital is needed,” he said.
“Margins are higher and the resulting cash flows overwhelm capital expenditure, so is returned to shareholders or the owners.”
“However, the barriers to entry for enterprises on the internet are very low, but the barriers to success are very high, especially when you have a company that comes to dominate its market.”
Rightmove
Rightmove is very much fulfilling these criteria, the manager says, which is why he holds 5 per cent of all of the total issued share capital.
“Rightmove has 78 per cent market share of pages viewed with 19,304 registered estate agents and new house developers. Last year, page impressions increased from 14bn to 15.4bn, making it one of the most popular websites in the UK. But you do not make money from page impressions.”
“The estate agents pay to have their properties on the site and last year Rightmove had revenue of £167m and made pre-tax profits of £122m. With margins over 70 per cent, Rightmove generates a lot of cash and, with annual capital expenditure averaging £1.2m, returned over £103m to shareholders via a share buy-back of £74m and dividends of £29m last year.”
According to FE Analytics, Rightmove has soared since it went public in 2006 at a rate of almost 11 times the gain of the broader equity market as measured by the FTSE All Share.
Performance of stock and index since 2006
Source: FE Analytics
He says since Rightmove became a public company it has returned more capital back to shareholders than its market capitalisation at the time of the initial public offering (IPO), £482m compared to the capitalisation at IPO of £424m.
“Our confidence in their business model, even with competition from Zoopla, Prime Location and new entrant Onthemarket.com, is not predicated on their large market share, but the fact that estate agents now generate 90 per cent of their house searches online, but only spend 27 per cent of their marketing and advertising budgets online.”
Betfair
Thomas is also betting on this online gambling firm, holding a significant stake worth 6.5 per cent of issued share capital.
It has had a rougher time since it went public in 2010 and has mostly stayed in negative territory but has most recently started to soar and is now ahead of the FTSE All Share.
Performance of stock and index since 2010
Source: FE Analytics
“They have the biggest betting exchange in the world, with a depth of liquidity not matched by anybody. They do not have the overheads of a string of betting shops, so can be very commercial and innovative in terms of odds and products offered to their clients,” the manager said.
“Their programmers have invented new products like cash out and price rush on their sportsbook which are imitated by competitors in time, but they are looking to innovate all the time to keep ahead of the competition weighed down by their betting shops.”
“Betfair’s CEO, Breon Corcoran, who was previously at Paddy Power, has iterated a strategy and is executing it well. That strategy is to acquire new customers via their sportsbook and exploit the value of the exchange by giving better odds on price rush, and so boosting the exchange liquidity.”
Thomas expects this approach to help Betfair increase market share and return more cash to investors in spite of changes in betting tax and a market supply that now shrinking.
“The company has just returned £200m to shareholders via a special dividend, of which £13m went into the AXA Framlington UK Select Opportunities fund. Betfair can offer customers favourable disruptive pricing, utilising the benefits of aligning the fixed odds sportsbook with the liquidity of the exchange,” he said
Autotrader
Lastly, Thomas says this market place for used cars also fits into the online retailer disruptor model that was formed by his longer term backing of Rightmove and Betfair. It is also one of his most recent acquisitions, having participated in its public listing in March following its sale from the Scott Trust, owner of the Guardian newspaper.
It is up 15.42 per cent since it went public in March, meaning it is slightly ahead the FTSE All Share.
Performance of stock and index since March 2015
Source: FE Analytics
“It has many of the characteristics of Rightmove, indeed it is chaired by former chief executive and founder of Rightmove, Ed Williams. Autotrader last printed a magazine in June 2013. Their advertising portal for second-hand cars has 69 per cent penetration of UK franchised car forecourts and 84 per cent penetration of UK independent car forecourts,” Thomas said.
“They have two to five times more car stocks than the closest competitors online, four times more site traffic than their closest competitor and 85 per cent share of ad minutes on their sites in a market supplied by motors.co.uk, eBay Motors, Piston Heads, RAC, AA, Gumtree and Exchange and Mart.”
“Again, 30 per cent of car classified adverts are still in print, but not only is Autotrader a good advertising medium, but the data gained from dealer transactions and pricing establishes the company as a business information tool to help the dealers to be more efficient in terms of stock turnover, selling cars that are desirable and priced correctly to maximise profits.”
AXA Framlington UK Select Opportunities has been managed by Thomas since 2002, returning 283.72 per cent, more than double the FTSE All Share’s gain over this period as well as the IA UK All Companies sector average.
Performance of fund, sector and index since 2002
Source: FE Analytics
The fund has clean ongoing charges of 0.83 per cent.