It’s always tough being a first mover in a market, and the Purplebricks (LSE: PURP) strategy of expanding to build a competitive advantage is understandable.
When you have a new idea, a new approach to a market, or whatever, it’s important to capitalise on it before your competitors can emulate it and get back to level competition again.
To that end, Purplebricks has stormed the UK market with its heavy prime time TV advertising campaign. That’s very costly, and it comes at a time when the UK housing market is being rocked a bit by Brexit and is slowing.
Long term I think the housing market is looking fine, as we’re suffering a chronic shortage in these isles, and successive governments have been doing what they can to boost housing construction and sales. But a badly-timed short-term squeeze is exactly what Purplebricks won’t want.
But more than that, it is pushing ahead with international expansion at a rapid pace. It’s now in seven states in the US, in Australia, in Canada, and in Germany.
The company recorded a 75% increase in revenue to £70.1m at the interim stage, with UK revenue up 39%, international operations contributed 31% to total revenue.
The expansion is coming at a price, and the company reported a first-half operating loss of £25.6m. Analysts are not expecting profits before the year to April 2021, and even then it would be very modest — putting the shares on a P/E of nearly 90, even after the loss of two-thirds of their value since their peak in July 2017.
Now, that first profit year P/E doesn’t say a lot, but it does mean we’ll have to wait at least a few years before we see any meaningful profits and are able to rationally value the shares.
And there are still the questions of whether Purplebricks’ funding will last that long, whether there will be any new cash required and what dilution that might cause, and how strong its first-mover advantage really is.
What’s really new?
On that final score, I really can’t see what Purplebricks is offering that is significantly new and cannot be easily replicated by competitors. The ‘no commission’ thing really just means it has a different way of charging, and at the end of the day all I can see is price competition. The underlying ‘we’re online and a bit cheaper angle, well, that doesn’t seem like a particularly wide defensive moat.
It was Warren Buffett who pointed out that first movers rarely make the biggest profits for early investors, and I can’t help feeling that’s exactly what we’re looking at here.
If you want to invest in anything property-related, I rate the UK’s FTSE 100 housebuilders as seriously undervalued now and I see their big dividends as very desirable.
Profits and dividends
Taylor Wimpey is on forecast dividend yields of around 10%, a similar level to predicted yields from Persimmon, and Barratt Developments shares have only slightly lower yields of around 8.5% on the cards.
All three have been recovering from big share price slumps since mid-December, but I still see all three as being attractively valued.