Online estate agent Purplebricks (LSE: PURP) has fallen out of favour with investors over the past 12 months. From its all-time high of 515p, printed in August 2017, the stock has since plunged 72% and is currently dealing at 146p.
This decline has hurt one of the company’s shareholders more than most, and that’s Neil Woodford.
Painful decline
His Woodford Investment Management remains one of the company’s largest shareholders, even though it has had to sell some shares recently to meet redemption requirements. According to the latest figures, Woodford still owns 28.88% of the shares, which suggests he is still a supporter of the business.
However, apart from Woodford, the number of analysts and investors who continue to believe in Purplebricks’s growth story is dwindling, and it is easy to see why. In recent weeks, the company has warned that its growth may not be as strong as expected and at the end of February, management informed investors that revenue for the 2018/19 financial year would sit between £130m and £140m. Only three months previously, alongside its interim results in December 2018, the firm declared full-year revenues would be £165m to £175m.
Such a significant change in outlook in such a short period is quite concerning. It implies management either doesn’t know what it is doing, or the market is deteriorating faster than expected. I think it is likely to be the latter.
As I have mentioned before, Purplebricks’ low-cost, upfront fee model works when the property market is booming, and properties sell themselves, but when the going gets tough, properties don’t sell themselves, which is where estate agents earn their fees. Purplebricks hasn’t really been around long enough to prove that its model can work in a property market downturn, and this concerns me.
Feeling the pressure
The company is already starting to feel the pressure here in the UK. After years of rapid growth, the firm reported that trading in its home market is currently “challenging” when it released its revenue warning at the end of February. In my view, this could be a sign of things to come. The UK property market has started to slow over the past 12 months, and Purplebricks is feeling the heat.
As the group is still not profitable, and even the most optimistic City forecasts do not expect the business to achieve profitability for the foreseeable future, I think there is a genuine chance that this business will have to tap shareholders for further funding shortly. Analysts at City broker Berenberg agree, which is why they recently slapped an 80p price target on the stock — that implies a decline of 45% from current levels.
Unfortunately, if the group’s revenue outlook continues to deteriorate, I don’t think this target is bearish enough. Unless the company abandons its global expansion plans, there is a strong chance it may run out of money altogether, and shareholders may not be willing to support a business that is unlikely ever to be profitable.
With this being the case, I think it is worth selling up and moving on to better opportunities.
