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When a FTSE 100 stock takes a beating, I always pay attention. That applies whether I hold it, or whether I don’t.
My first thought is the obvious one â what just happened? Then my investor brain kicks in and I ask myself: is this an opportunity to buy at a lower price? At The Motley Fool, we like to buy good companies when theyâre out of favour, with the aim of picking up a bargain. We can potentially get in at a lower valuation and maybe grab a higher yield as a result. When a companyâs share price falls, the yield automatically rises. Itâs just maths.
Rightmove share price plunge
So when I saw shares in property portal Rightmove plc (LSE: RMV) crash 27% on Friday morning (7 November), I sat up. Nearly £1.4bn was wiped off its value as investors fretted over plans to invest heavily in artificial intelligence. Rightmove said it was âaccelerating technology investmentâ and would make AI âcentral to all that we doâ. But underlying operating profit growth was forecast at just 3% to 5%, despite rising 9% in the first six months of this year.
Its early slump feeds into wider fears about AI. Investors everywhere are fretting over whether tech companies can generate a real return on their huge investment. Rightmove no doubt got caught up in that.
Buying shares after a big one-day drop is risky at any time. Sometimes the market overreacts and a rebound follows. To a degree, that happened on Friday. The shares rallied and closed down just 12.5%.
The Rightmove share price is down just 4% over 12 months. Today’s share price of 575p is up almost 45% on a decade ago. Dividends are on top.
At other times, more bad news follows, as Iâve seen with former FTSE 100 growth stars like Diageo and JD Sports Fashion. I bought both after shock profit warnings but they’ve remained highly volatile ever since.
Strong market position
As the dominant property portal, Rightmove has pricing power with estate agents, while its subscription-based model provides strong, recurring cash flows, supporting regular dividends. It benefits from rising house prices, as more expensive listings mean agents pay more to advertise.
As always, there are threats. Housing market volatility could hit listings and falling or stagnant prices may threaten subscriptions. Competition from rivals such as Zoopla, OnTheMarket or new PropTech apps could erode market share. Regulatory shifts â from stamp duty to mortgage availability â could also reduce transaction volumes and impact revenues. And now there’s the big question whether AI investment will pay for itself.
Valuation matters
Even after Fridayâs slump, Rightmove isnât a screaming bargain. Its price-to-earnings ratio stands at 25, well above the FTSE 100 average of 18. The trailing dividend yield remains a modest 1.71%.
Peel Hunt analyst Jessica Pok responded to Friday’s mayhem by noting that Rightmove is set for stable growth in 2025. She reckons its AI plan âpositions the business to stay ahead of the curve, by enhancing its proposition and unlocking future monetisation”.
Brave contrarians might consider buying on the dip, but I’d urge caution. I’ve bought shares on bad news, and wished I’d waited to let the dust settle first. There could be more accidents ahead. I can see more tempting FTSE 100 shares out there today.
The post Down 12.5% in a day! Is this FTSE 100 stock a brilliant bargain or an accident waiting to happen? appeared first on The Motley Fool UK.
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More reading
- Down 24% in a day!? Why the Rightmove share price crash might be a huge opportunity
- How much passive income could you make by investing £1,000 a month for 10 years?
Harvey Jones has positions in Diageo Plc and JD Sports Fashion Plc. The Motley Fool UK has recommended Diageo Plc and Rightmove Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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