I’ve always been sceptical that Purplebricks (LSE: PURP) can be a successful business in the long term because the property market is a very uncertain beast.
When prices are rising, it’s straightforward to sell properties, which makes the online estate agent’s business model of a single upfront fee, attractive. However, when prices are falling, and buyers aren’t queuing up to place offers, the service offered by traditional estate agent becomes invaluable. In a falling market, estate agents start to earn their fees.
Purplebricks has never been tested in a falling market, so we don’t know how the company will perform in this environment. But with home prices across the UK starting to slide, we’ll soon find out.
The problem the company now faces is trying to stave off losses in its home market while growing overseas. Purplebricks is trying to break into the US and Australian markets and this expansion incurred losses of more than £30m in the first half of last year.
So far, the UK business has helped to fund these losses with the home division reporting a profit of just over £4m in the first half of last year. Although this wasn’t enough to prevent overall H1 losses doubling.
Meanwhile, City analysts are not predicting any profit for the group for at least the next two years, possibly longer, if sales in the UK start to fall. With so much uncertainty surrounding outlook for the business, I’m a seller not a buyer at current levels.
On the other hand, I think Purplebricks’ peer OnTheMarket (LSE: OTMP) has a much brighter future.
Fatter profit margins
There are several critical differences between these two businesses. OnTheMarket is an online property portal and doesn’t get involved with buying and selling properties like Purplebricks. I think this is a much better business model, and one that we know can succeed as proven by Rightmove and Zoopla.
Traffic to the site is surging, with the number of visits exceeding 23.5m in January, a new monthly record, according to the company. The number of estate agent branches using the site has more than doubled year-on-year. In January, OnTheMarket delivered more than seven times as many phone and email leads than it did at the time of its IPO at the beginning of 2018.
What I really like about the online property portal model is that it requires relatively little capital investment to set up. Once the initial systems are in place, economies of scale are quickly realised. Rightmove, for example, reported an operating profit margin of 73% for 2017 and a return on capital employed — a measure of profit for every £1 invested in the business — of 1,000%.
If OnTheMarket can replicate this success, I think there could be significant gains ahead for shareholders.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Rightmove. 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.