Purplebricks Group plc isn’t the only ‘game-changer’ stock I’d sell today

G A Chester discusses why he’d sell Purplebricks Group plc (LON:PURP) and another stock with a ‘disruptive’ business model.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Hybrid estate agency Purplebricks (LSE: PURP) released its first-half results recently and my Foolish colleague Zach Coffell provided a good review of the headline numbers and an overview of the company. Today, I’m going to focus on one key question: is the company’s disruptive business model sustainable?

Missing numbers

Purplebricks never tells us how many properties it actually sold in any period. Previously, various figures it gave made it possible to at least estimate the number. My calculations of the average sale price suggested that either the company was cornering the market in trailer park homes sales or that a rather large proportion of instructions weren’t being converted to completions. Obviously, if you’re charging a fixed fee but fail to complete the sale in too many cases, you’re not going to have a sustainable business in the longer term.

In its latest results, Purplebricks omitted two numbers it had routinely published previously that enabled the aforementioned estimate of average sale price. Conversion from instruction to sale agreed (which had been climbing and reached 83% in the last full year) was entirely absent from the recent H1 results. As was a corresponding figure for the full-year: “Sale agreed in the UK every 9 minutes 24/7.”

Sustainability and valuation

In addition to the omitted information in the latest results, the table below — based on numbers Purplebricks does give — adds to my concern about the sustainability of its business model.

  H1 2015/16 H2 2015/16 H1 2016/17 H2 2016/17 H1 2017/18 H2 2017/18*
UK revenue (£m) 7.2 11.4 18.3 24.9 39.9 44.1
Revenue growth (H1-H1 and H2-H2) 800% 338% 154% 118% 118% 77%
UK marketing spend (£m) (6.6) (6.3) (6.6) (7.8) (10.1) ?
UK marketing spend increase (H1-H1 and H2-H2) 0% 24% 53% ?

* Based on FY guidance of £84m in H1 results

As you can see, the company is having to increase marketing spend quite dramatically, while revenue growth is decelerating, also quite dramatically. For me, this trend appears ominous for the market’s future top- and bottom-line growth expectations, with the shares trading at over six times forecast revenue and 160 times forecast earnings for the company’s 2018/19 financial year.

Due to the eye-watering valuation, my doubts about the long-term sustainability of the business model and a number of other issues, I rate the stock a ‘sell’. And on that same note…

Serial disappointer

Tungsten (LSE: TUNG) bought a near-bust e-invoicing firm for over £100m in 2013 with a view to using its large database of clients to create a lucrative invoice discounting business. Four years on, in its half-year results earlier this month, the company reported less than £17m revenue from e-invoicing and just £167,000 from invoice discounting. It posted a loss before tax of over £9m and has also missed its target “to achieve monthly EBITDA breakeven in calendar 2017”.

Even if Tungsten manages EBITDA breakeven next year, cash flow is another matter. An improvement in cash outflow from operations in the last financial year — down to £12.3m from £18.1m — was helped by it capitalising software development costs for the first time in its history (£3.6m). Similarly, a reduction in the outflow in the latest H1 results to £4.5m from £6.3m came with £2m of capitalised costs. Positive free cash flow remains only a distant possibility in my eyes. As such, I rate this serial disappointer a ‘sell’.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »