The Motley Fool

The Purplebricks share price, undervalued bargain or investment trap?

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.

Clock pointing towards a 'sell' signal
Image source: Getty Images.

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.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

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.

Market jitters

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.

Costly expansion

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.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Alan Oscroft owns shares of Persimmon. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.