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’.
