This growth stock has beaten the Purplebricks share price by 45% in 2018

Losses are mounting at Purplebricks Group plc (LON:PURP). Roland Head asks if there’s an opportunity for investors, or should he look elsewhere?

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The Purplebricks Group (LSE: PURP) share price has fallen by 58% so far this year. Today I want to take a fresh look at this fast-growing online estate agent.

I’m also going to take a look at a different kind of internet stock. The company concerned has 10-bagged over the last 10 years and is ahead of Purplebricks by 45% so far in 2018.

Should we ignore mounting losses?

My colleague Graham Chester reviewed Purplebricks’ half-year trading update recently. I agree with his view that we don’t yet have enough information to know whether the firm will hit its growth targets this year.

What I do know is that the near-term outlook for the firm seems to be worsening. One year ago, analysts expected the firm to report earnings of 2.3p per share on sales of £169m in 2018/19. Today, forecasts indicate a loss of 10.8p per share on sales of £173m.

It’s a similar story in 2019/20. Forecasts for earnings of 10.4p per share have been replaced with an expected loss of 4.6p per share.

One reason for these downgrades is that the group’s international expansion has been ramped up. In the short term, this means that profits from the UK business are being swallowed up by operations overseas.

Is PURP a genuine disrupter?

If the group’s global expansion is successful, this business could become a genuine disrupter, like Amazon.

Personally, I don’t think this is likely. Purplebricks’ business model seems more like evolution than revolution to me. Its sales and property listings still depend on a small army of estate agents (630 in the UK). The only difference I can see is that they don’t have offices.

Although the firm’s fixed-fee model is different to a traditional commission rate, I believe mainstream agents will be able to adapt their pricing to become more competitive if they need to.

Purplebricks may well cause estate agents’ profit margins to fall. But I don’t think it’s a truly disruptive business. For this reason, I view the shares as expensive and risky.

One internet stock I admire

Picking the right internet businesses to back isn’t easy. The gap between success and failure is often quite small.

However, one tech stock that has delivered growing profits and dividends over many years is web hosting and cloud services provider Iomart Group (LSE: IOM). The share price of this AIM-listed firm has risen by 990% over the last 10 years, from 32p to 350p.

More recently, sales have risen from £56m in 2014 to £98m last year. Adjusted pre-tax profit has risen from £14.6m in 2014 to £24m in 2018.  

Tuesday’s half-year results suggest this progress is continuing. Sales rose by 8% to £50.9m during the six months to 30 September, while adjusted pre-tax profit rose by 7% to £12.4m. Shareholders will receive an interim dividend of 2.45p per share, an 8% increase on the same period last year.

Why I’d buy

Iomart has generated a return on capital employed of 15% over the last 12 months. That means that for each £1,000 invested in the business, it generated an operating profit of £150.

This is consistent with previous years. It tells me that this is a good quality business that’s generated real returns for shareholders.

The stock currently trades on 17 times forecast earnings with a 2.2% yield. That’s not cheap, but I think it’s worth considering as a long-term buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK owns shares of Iomart Group. 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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