Is the Purplebricks share price now too cheap to miss?

Shares of Purplebricks Group plc (LON:PURP) are trading at a level not seen since 2016. Could it be time to load up?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Shares of hybrid estate agent Purplebricks (LSE: PURP) hit an all-time high of 525p in the summer of last year. However, we’ve seen a major decline since. A further 12% drop last Thursday, following the release of the company’s half-year results, took the price down to near 130p. And while there’s been a mini-recovery in subsequent trading sessions, the shares remain around a level not seen since 2016.

I confess I’ve been bearish on Purplebricks for a long time, in company with most of my Motley Fool colleagues. However, it’s said that every stock has its price. With this in mind, do I think Purplebricks is now too cheap to miss?

Big issue

My colleague Kevin Godbold wrote an article reviewing last week’s results, but I’m going to focus today on one big issue that previously informed my bearish view. I was concerned that revenue growth in the UK was slowing dramatically, despite the company significantly increasing its marketing spend. Do the latest results allay my concern?

In the table below, I’ve broken out UK revenue and marketing spend into half-years (H1 and H2). The increase and growth rate figures are on the basis of H1-H1 and H2-H2.

  H1 2015/16 H2 2015/16 H1 2016/17 H2 2016/17 H1 2017/18 H2 2017/18 H1 2018/19
*Revenue (£m) 7.2 11.4 18.3 24.9 39.9 38.2 48.6
Revenue increase (£m) 6.4 8.8 11.1 13.5 21.6 13.3 8.7
Revenue growth rate 800% 338% 154% 118% 118% 53% 22%
Marketing spend (£m) 6.6 6.3 6.6 7.8 10.1 11.3 13.5
Marketing spend increase (£m) 5.5 3.9 0.0 1.5 3.5 3.5 3.4
Marketing spend growth rate 500% 163% 0% 24% 53% 45% 34%

* Under International Accounting Standards (IAS) 18.

As you can see, Purplebricks ramped up marketing spend to over £6m in 2015/16 (the year it listed on the stock market). This produced an impressive initial revenue growth rate of 800% from a low base. And while this rate soon began to fall rapidly, revenue continued to rise in £m terms. A further significant ramp-up in marketing (by £3.5m) to over £10m in H1 2017/18 temporarily halted the deceleration of the revenue growth rate at 118%. And saw the £m revenue increase hit a high of £21.6m.

However, since then, further c.£3.5m marketing increases in each period have produced lower incremental £m revenue gains — namely, £13.3m and £8.7m. The revenue growth rate has more than halved in each period. Ominously, in the latest period, it’s below the growth rate of marketing spend for the first time (22% versus 34%). It seems Purplebricks has to continually ramp-up marketing, but is getting a diminishing revenue return from it.

Tipping point

Looking ahead to H2 2018/19, if the revenue growth rate were to continue its trend of more than halving, and marketing were to continue its trend of rising at c.£3.5m per period, we’d reach a tipping point. The increase in revenue generated would be no more than the increase in marketing spend.

Purplebricks’ latest numbers look to me to provide a further indication of a trend towards this negative outcome. As such, the results only increase my doubts about the long-term viability of the business model. And with management in the process of spending tens of millions on aggressive international expansion, I continue to see it as a stock to avoid.

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.

G A Chester 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.

More on Investing Articles

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Could the stock market crash in the second half of 2025?

As the FTSE 100 hits a new high, could a stock market crash be coming? Our writer thinks there's a…

Read more »

Man hanging in the balance over a log at seaside in Scotland
Investing Articles

Start investing this summer with a spare £250? Here’s how!

Christopher Ruane explains how an investor with a few hundred pounds to spare and no prior experience could look to…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Is Palantir stock the new Nvidia? Why UK investors should (or shouldn’t) care

Palantir stock’s the top performer on the S&P 500 this year. Should UK investors consider it amid a blistering AI-fuelled…

Read more »

Investing Articles

3 FTSE 100 shares I think look undervalued

The FTSE 100 may be hitting record highs but there are still bargains to be had on the index. I…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20,000 in savings? Here’s how to target £841 of passive income each month

Passive income plans don't need to be complicated. Our writer explains how someone could target a sizeable second income buying…

Read more »

Happy couple showing relief at news
Investing Articles

3 passive income strategies I like to try to double the State Pension with just £100 a month

Investing consistently, with diligence, and patience can lead to an impressive stock market income that puts the State Pension to…

Read more »

ISA Individual Savings Account
Investing Articles

£20,000 invested in a Stocks and Shares ISA 10 years ago could now be worth…

Stocks and Shares ISA investors have earned tremendous returns in the last decade, but just how much money has been…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

An 11.5% yield?! Here’s the dividend forecast for a hot income stock

This steadily recovering income stock has the highest dividend yield in the FTSE 250, which looks like it’s here to…

Read more »