Shares of Purplebricks (LSE: PURP) are up more than 15% in early trading after the company disclosed it intends to expand into the US after a £50m rights issue. Analysts are unsurprisingly bullish on the prospect of the online hybrid estate agency targeting the massive American real estate market. But should you be bullish too?
Who wouldn’t want a piece of this pie?
The opportunity Stateside is definitely game-changing for the relatively small company. It estimates that estate agent commissions in the States total $70bn each year, more than 16 times the value of those in the domestic real estate market.
This isn’t surprising given the size of the US market as well as the fact that commissions tend to be 5%-6% of the value of a home, with half going to the agent for both the seller and the buyer. Given Purplebricks charges a flat fee that averages £1,200 in the UK, I reckon it will find plenty of interested sellers in the US who are sick of paying high fees.
There’s also the potential for additional revenue streams from multiple listing services (MLS), which are sites that allow selling agents to list all their properties and buying agents to introduce more options to their clients. These MLS take a cut of the commission if they introduce the selling and buying agents for a successful transaction. This could be big bucks for Purplebricks as it builds up a massive database of home movers like it has done in the UK.
Now, moving into the US isn’t going to be a bed of roses right off the bat and UK firms across various sectors have a history of falling flat there. Also, the placement of almost 23m shares will be fairly dilutive for current shareholders . But I believe this is a great opportunity for the company and current/future investors.
A reassuring history of success
For one the founder-led management team has proven itself capable by building the brand in the UK and then successfully exporting it to another foreign market– Australia. And they are no slouches when it comes to financials either, having proven their business model works as UK operations became profitable in H1 2016.
And the company isn’t rushing gung-ho into America. It is beginning by expanding into a handful of key states and then slowly pushing into new regions. Furthermore, the business model of low upfront fixed-fee pricing combined with independent local estate agents provides considerable downside protection. The company doesn’t have to build expensive high street agencies or employ loads of people and receives its fees whether the house is sold or not.
In addition, the US estate agency market is highly fragmented. Most agencies are small, one-shop affairs, which bodes well for Purplebricks and its highly efficient online housing database.
There are certainly risks if you invest in lossmaking AIM shares. But I’m very encouraged by the fact that the company’s business model is working well in the UK and Australia, the founding pair of brothers remain deeply engaged in the company, and it has wads of cash on hand with no debt.
Add in the frankly mind-boggling potential of grabbing even a tiny piece of the massive American real estate market and I reckon Purplebricks has a very bright future ahead of it.
