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Is this growth stock set for a new boom in 2021?

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To a long-term investor, four years can be no time at all. That’s how long it’s been since Purplebricks (LSE: PURP) was the hottest growth stock in town, and it seems like only yesterday to some of us. Back in July 2017, the Purplebricks share price briefly broke through 525p. As I write, it’s at 81p.

Many early growth stories come to grief and share prices crash back. But some of the best often go through a number of up-and-down cycles before providing shareholders with healthy long-term gains. Will Purplebricks be one of them? Tuesday’s annual results might give us some idea.

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Revenue for the year to 30 April 2021 rose 13%. More importantly, adjusted EBITDA soared from £2.9m to £12m. That’s a 314% jump, which looks impressive. But it does have to be seen in the light of the Covid crisis. In that context, it doesn’t make longer-term growth prospects too clear.

Still, the year did produce an operating profit, of £8.2m. And from a loss of £5.7m last year, that could be a game-changer. The balance sheet ended with cash of £74m, up from £31m, and that boosts my confidence in the company’s sustainability. So yes, I do see a possible growth stock buy here.

What really matters

But there’s one key thing that jumped out at me, and it hammers home the downside of this sector for me. Purplebricks, famous for its “no commission” advertising message, is rolling out a change to its pricing policy. In the words of CEO Vic Darvey: “The group has responded to a changing market and we are delighted to offer customers an option of reimbursement of their upfront fee payment if they do not sell their home.”

What that reiterates for me is that it’s all about price. We have to pay estate agents for their services, one way or another. And the figure at the bottom of the bill is really what matters.

Selling a house? I expect savvy sellers will look around for the lowest overall charge. The online estate agent business is increasingly competitive, and they’re all doing their utmost to provide the best value service. For me, that means there’s little in the way of differentiation other than simply price competition.

Growth stock valuation

Purplebricks reported EPS of 2p, though that includes discontinued operations. From current operations, we’re looking at half that. At the current share price, that’s a P/E of 41 on total earnings, and 82 on continuing operations.

Purplebricks is clearly still a growth play at that valuation. But we are starting from a low pandemic-affected level, and I do see a real possibility of strong growth over the next five years. Oh, and I’m old and boring, and internet estate agenting might genuinely stand a good chance of cleaning up.

But it’s a growth stock, in a highly competitive market. That’s still too risky for me.

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Alan Oscroft 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.

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