Having breached the £5 mark for the second time in early August, shares in online estate agent Purplebricks (LSE: PURP) had fallen almost 30% in value in just under two months before today. Are investors beginning to see cracks in the company’s business plan or is this just a minor blip on a path to making early holders millionaires?
Rapid growth
Today’s update — coinciding with its AGM — made reference to “strong progress” being made in the three markets in which Purplebricks now operates. Trading remains “on course” to meet the guidance issued by the company when revealing its full-year results in June, with revenues of £80m and £12m expected from the UK and Australia respectively. Positively, H1 revenue in the UK is likely to be more than double that achieved over the same period in 2016. For more evidence of just how quickly the company is growing, Purplebricks was required to hire an extra 100 Local Property Experts in the UK and 23 more in Australia over the reporting period.
Despite all this, it’s progress on the Solihull-based firm’s ambitious plan to crack the $70bn US real estate market that investors will be focusing on. On this front, the region-by-region rollout in Los Angeles that began only a couple of weeks ago went “smoothly” and “ahead of plan” according to the company. Response to a TV advertising campaign — not dissimilar in tone to ads run in the UK — has also been “encouraging” with the volume of traffic hitting the Purplebricks website and the number of valuations booked exceeding that of the UK and Australia “at the same period of development“.
Millionaire-maker?
So, could Purplebricks still make you a millionaire? It’s hard to say.
On the bull side, the company’s first-mover status has allowed it to take an already commanding share of the online market in just three years. The prospect of saving money has clearly struck a chord with sellers and taken many traditional estate agents by surprise. As long as it doesn’t spread itself too thin, too fast (which some may argue it’s already doing), recent diversification could pay off. Indeed, the fact that the company is rapidly expanding outside of the UK into new, potentially lucrative markets should also give it a degree of protection as we move towards our EU departure. Although some remain deeply sceptical as to whether the firm has the ability to build market share in the US on a fairly limited budget, Purplebricks also looks in good shape financially with £65m of cash on its books and no debt.
On the flip side, the company’s £1bn valuation continues to feel very rich for a business still to make a profit and unlikely to do so until 2019. The volatility of its shares over the last few months shows just how nervous some investors are over the company’s outlook (as well as hinting at an increasing aversion to high-growth stocks in general). Moreover, cracking the US market won’t be easy thanks to the huge amount of competition it faces and the possibility of its offering being quickly replicated by rivals.
Having sold my holding earlier in the year, I’m content to watch Purplebricks’ progress from the sidelines for now. While it could be a hugely rewarding share to hold over time, those remaining invested should expect a bumpy ride.
