Purplebricks (LSE: PURP) and eve Sleep (LSE: EVE) have a number of things in common. Both are ‘disruptors’ in their respective markets, both are growing sales rapidly but have yet to turn a profit and both count Neil Woodford as their biggest shareholder.
I’ll come to Purplebricks shortly, but first I’m going to discuss eve Sleep, which today released its maiden annual results as a listed company. This designer and seller of own-branded mattresses and other sleep products, including duvets, pillows and sheets, bills itself as a disruptive business, because it’s “e-commerce focused.” Its aim is: “to become the leading pan-European sleep brand.”
Not exactly unique
eve was founded as recently as 2014 and listed on AIM at 101p a share in May last year. Woodford already owned 17.5% of the company before its IPO but has since built his stake to over 28%.
The company today reported a whopping 132% increase in sales to £27.7m, a tad ahead of City expectations of £27.4m, but a bottom-line loss of £19m. The shares rose 2% in early trading to 130p, valuing the business at £180m.
The hefty rating of 6.5 times sales shows a good deal of future growth is already in the price. However, while management reported increased sales up 94% for the first six weeks of the new year, the City forecast for 2018 ahead of today’s results was for continued growth of around 130%. Six weeks isn’t long, of course, but if growth is decelerating significantly, the market may well decide a less bullish price-to-sales ratio is merited.
eve’s e-commerce focus isn’t exactly unique and I see plenty of competition in the subjective and maybe faddish comfy mattress space. For this reason, I reckon there’s a high risk eve will fall short of sales growth rate expectations and management’s target of group profitability by the end of 2019. Due to the elevated price-to-sales rating and a sky-high ratio of over 200 times forecast 2019 earnings, I rate the stock a ‘sell’.
Bricks could tumble
Thanks to the success of its extensive advertising campaigns, hybrid estate agency Purplebricks needs no introduction. Woodford also owns just over 28% of this company. However, because it’s one of the bigger companies on AIM — a market cap of over £1bn at a share price of 390p — the £300m value of his holding is considerably larger than his £51m stake in eve. Indeed, Purplebricks is a top six holding in all three of his funds.
City analysts expect the company to report revenue of near to £100m for its financial year ending 30 April but the same £19m bottom-line loss as eve, followed by a maiden profit in fiscal 2019. Its price-to-sales ratio of over 10 is even higher than the mattress specialist’s, while it also trades on over 200 times forecast 2019 earnings.
I’ve long been concerned that Purplebricks’ instruction-to-sale-completion rate may be relatively low. Although the company has disputed such claims, it continues to decline to publish the number in question. I remain sceptical about both the long-term sustainability of its no-sale-still-pay business model and the attractiveness of this model in what looks like a near-term slowing UK housing market. For these reasons, this is another highly rated stock on my ‘sell’ list.
