If your investment portfolio includes a lot of real estate portal companies, it has probably been taking a beating recently. Even before this latest bear market, OnlineMarketplaces.com calculated that between them, public companies that operate real estate portals had lost their investors over a quarter of a trillion dollars in value in the preceding 12 months.
The thing is though, for many of these portal companies the numbers in their profit columns have never been so high. That got us thinking...
We may not be naive enough to believe that a company's share price will automatically go up with its profits but we are curious enough to find out a little more about the relationship between the two.
We plotted the financial data of 8 portal operating companies from around the world against their share price over the last few years to get a rough sketch of the relationship between the two. What we found is that although the market does mostly respect a company's bottom line, it is by means always a logical or close relationship.
The following is based on company financial records and data from Google Finance (taken as the closing price on the last day of each quarter or half-year). It is merely informative and is definitely not offered as any kind of financial advice.
The chart looks like a cautionary tale for both investors and portal companies alike. The lesson: don't bet the farm on iBuying.
The Seattle-based portal company was seen by many as a pioneer of the next generation of real estate. It was a company feted by analysts as driving the change of an industry that had steadfastly refused to be digitised and disrupted. Once the meltdown of its iBuying division hit the balance sheets in the Autumn of 2021, Zillow's share price followed its profits downwards.
The company's profit column has since shed that pesky minus sign although that's largely because it is selling all the houses it bought before shuttering its iBuying operations. Zillow's share price has hit new lows of under $40 over the last few weeks and investors will be hoping that the company's latest big idea, the housing 'super app', is rather more successful than its iBuying moonshot.
Zillow can still be the company that its 2020 narrative claimed it could be, it will just have to work even harder to do so.
The commercial real estate giant is in many ways the polar opposite of its new residential real estate rival, Zillow. Where west-coast based Zillow is all about looking to the future, East-coast CoStar is, reportedly, all about the results here and now. Where Zillow's CEO Rich Barton uses conciliatory language, CoStar boss Andrew Florance makes headlines with incendiary soundbites.
The two companies' outlooks are perhaps reflected in how their share price relates to their profits. Zillow's share price until recently was based on the potential future earnings of a very ambitious model. For many years CoStar's share price has been closely pegged to profits which have been generated on a more grounded approach. Up until the recent market downturn, the two grew in tandem.
Although running real estate portals is hardly the main enterprise of Latin American e-commerce giant Mercado Libre, its fortunes on the choppy seas of the open market reflect a classic tech company pattern.
While the company's share price grew at a rate of knots until the most recent market slowdown, quarterly net income has been erratic - sometimes positive and sometimes not. The graph clearly shows that MELI's investors value the potential of a market which is constantly expanding and that no longer relies on the firm's roots in the online classifieds market.
The German market leader may have divested from its autos business around the same time that the global pandemic caused a lockdown in Germany, but its price didn't suffer for long.
Scout24's profit and share price have had a pretty logical relationship over the last few years. That said, despite the company posting its best-ever quarterly profit as recently as Q1 FY22, the share price has failed to follow the same trajectory.
Scout24's investors got a surprise when the stock shot up around 17% in April amid rumours that a bid to take the company public was imminent.
Unlike the other charts on this page, Fang.com's ends abruptly in 2020. That's because the Chinese portal company stopped releasing its results to the market after that date.
The stock has subsequently been removed from the New York Stock Exchange with the SEC having run out of patience with the portal's lack of disclosure. It seems that investors had lost patience with Fang.com long before that though as the price for NYSE:SFUN had been on a downward trend ever since 2014 following a downturn in the primary market.
The company's business model involved selling banner ads to developers. After 2014, Fang.com tried to pivot and take on the country's agents by offering transactions at 0.5% commission. In doing so management burned bridges with customers and was forced to change back to its initial model... All of which evidently didn't lead to more negative quarters than positive ones and did not sit well with investors.
Rightmove and its ever-increasing profits could be used to teach students about network effects, the benefits of being a first mover, brand strength or just about any other important factor in the real estate portal game.
Although the company's share price has taken a significant hit along with all other tech firms over the last few months, it was trading at record highs of nearly GBX800 at the end of 2021.
In 2018, Investment Analyst Phil Oakley described Rightmove as...
"probably the most impressive business I have ever looked at in over 20 years as an analyst and financial journalist."
...and we doubt that he will have changed his mind since then as the British market leader went on to have a record-breaking 2019 with post-tax profits of £173 million, a result which was bettered by 2021's £183 million.
Much like CoStar, Rightmove's share price seems to be closely tied to the performance on its balance sheets rather than any glittering promises. The portal company has been criticised in some quarters for not innovating its tech or taking on new challenges and some have questioned the sustainability of the price increases its business model seems to be built on.
Investors will be keeping a keen eye on who might replace longtime CEO Peter Brookes-Johnson, who is set to leave the company, and whether his replacement will use Rightmove's power to do something more ambitious in the industry.
REA Group's profits and share price look very similar to those of Rightmove. Both have cornered their respective home markets and are reaping the benefits of being the premier brand in property marketing in two mature markets where those selling homes have plenty of cash to spend.
Unlike its British counterpart, however, REA Group has interests beyond the shores of its domestic market. The company is majority-owned by Rupert Murdoch's News Corp through which it has ties to the U.S. portal Realtor.com. REA Group is also a major shareholder of the newly public Southeast Asian portal group PropertyGuru and owns a subsidiary in India (REA India) through which it controls one of the leading real estate portal networks (Housing.com, Makaan and PropTiger) in an exciting emerging market.
Although its Australian portal business still generates around 90% of its overall revenue and an even higher percentage of its profits, REA Group sees huge potential in its offshore assets. Although its share price is fairly closely related to its performance for now, there may be a certain degree of divergence for REA Group as investors decide they want exposure to the potential future earnings in Southeast Asia and India.
At the time of writing, the shares of Australian #2 portal group Domain Holdings were trading at A$3.13, some 17% down from its opening price back in 2017 of A$3.80. Although this is largely down to the latest bear market dragging tech stocks down around the world (which we've deliberately left off the chart), the story of Domain's share price is not the Himalayan ascent of others on this page.
Since being spun off from Fairfax Media in 2017, neither Domain's share price nor its profits have been able to hold on to gains. In the chart above there are three half years where the comany's share price dropped and there are four where its profits drop. Although the company can cite some mitigating circumstances, investors don't tend to like those very much...