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Online property portal Rightmove (LSE:RMV) saw its share price become the latest casualty of AI fears. The stock initially fell 24% on Friday (7 November) before ending the day down 12%.
I’ve been wary of the threat of AI that can write code for a number of tech companies recently. But Rightmove isn’t one of them and I think the stock falling is an overreaction.
AI disruption
AI has now reached the stage where it can write software code in minutes. And that’s clearly a massive problem for any business where this was supposed to be the main barrier to entry.
Any tech company with a product that can be imitated by code-writing AI is now in trouble. Their customers might not all leave, but raising prices is going to be difficult.
In other words, their growth prospects are now much worse than they were before. And that creates downward pressure on a share price if it previously reflected high expectations.
Some software companies, however, have other barriers to entry. In these cases, competing isn’t as straightforward as creating an AI product, and their prospects are much better.
Winners and losers
So far, I think all of this is reasonably uncontroversial. AI clearly can write code and this is obviously a problem for a company where this was supposed to be its unique strength.
The big question that divides investors, is which companies are the ones that have other barriers to entry and which ones are in trouble? And this is a bit less clear.
Rightmove’s business works by connecting property buyers and sellers. And the threat comes from the possibility of some sort of AI-driven search doing this at a cheaper price.
The big question is whether or not Rightmove has anything that can’t be copied. I think it does and that’s why I’m optimistic about the stock despite the market’s reaction.
Network effects
Rightmove is a near-monopoly in the online UK property search market. And there’s a reason it’s been able to fend off competitors so effectively in the past.
In fancy investing terms, it has what’s called a two-sided network effect. Basically, having more listings attracts more buyers and having more potential buyers encourages sellers to list.
For competitors, it’s hard to get started. Sellers have no incentive to list on another website that doesn’t have any buyers, but why would buyers look at a site that with fewer listings?
Rightmove is a place where potential buyers know they can find properties easily. And I don’t see them going elsewhere unless the company gives them a reason to.
Durability
It would be a huge risk for sellers to stop listing on Rightmove in the hope of driving buyers to a different platform. And it’s one they’ve not been willing to take in the past.
Can AI search encourage them to do start doing this in a way that would be bad for the FTSE 100 company? It’s not impossible, but I don’t think it’s particularly likely.
As a result, I think the 12% drop in the Rightmove share price is a huge overreaction from the stock market. At today’s prices, the stock goes on my buy list.
