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Will 2019 be the year to return to Neil Woodford favourite Purplebricks?

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At one time, well-known British fund manager Neil Woodford must have been a big fan of hybrid estate agency Purplebricks Group  (LSE: PURP) because there’s a wodge of the shares in all three of his funds, the Income Focus, Equity Income and Patient Capital Trust.

I would imagine that he is less enamoured with the stock today than he was when he bought it because it hasn’t had a good year. Since January, the share price is down around 66%, but my guess is that Woodford can still see potential in the company otherwise why would he continue to hold?

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Rising revenue and rising losses

After such a prolonged slide in price, there is always the possibility that better value could emerge, as long as the underlying business is sound and continues to grow. Maybe 2019 could turn out to be a good year for the firm’s shareholders. The company could go on to deliver decent investment returns as it disrupts the estate agency sector, after all.

In case you don’t know – and haven’t seen the firm’s amusing TV adverts – Purplebricks is a real estate agency based in the UK and also operating in Australia, the US and Canada. It combines what it describes as “highly experienced and professional local property experts” with “innovative technology” to make buying, selling and letting property “more convenient, transparent and cost-effective.” But it seems to me the main differentiator is that Purplebricks offers a cheaper service to customers than many other estate agents can.

Today’s half-year report reveals that revenue rose 75% year-on-year to just over £70m, of which a little more than £48m came from the UK, up 39%. It seems that the company has been winning market share, but the problem is that the business hasn’t been profitable so far. The operating loss for the first six months of the trading year was a massive £25.6m, up 122% from £11.4m a year ago.

Are falling losses too much to wish for?

I can understand why the share price has been falling. The main thrust of today’s report seems to be all about the firm’s drive to win market share in the territories in which it is active. But at what cost? Fast revenue growth is one thing, but I want to see operating losses falling as revenue rises. What the figures tell us today is that operating losses have been growing faster than revenues – not good.

So, I’m sitting this one out until the figures justify the case for investing. And, to me, that means shrinking losses. My suspicion is that the share price will continue to fall as long as those losses keep expanding, no matter how big the revenue becomes. So, the firm can be as innovative and disruptive as it likes, but only profits will confirm that the business model is sustainable. And that’s a buzzword that would be a good addition to the firm’s reports – ‘sustainable’.

On top of being loss-making, the firm’s business is also cyclical, and a cyclical downturn could put the company in an extremely precarious position if it arrives. I continue to view Purplebricks as ‘risky’, so I have no plans to buy any of the firm’s shares for 2019.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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