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Is It Nuts To Buy Purplebricks Group PLC And Rightmove Plc Now?

Hybrid estate agent Purplebricks (LSE: PURP) and internet property advertiser/portal Rightmove (LSE: RMV) are chopping their way through traditional estate agency, each in their own way.

Those firms’ potentially disruptive attack reminds me of what Aldi and Lidl are doing to the supermarket sector. So far, Rightmove and its peers such as Zoopla appear to have enhanced the offering of traditional estate agency businesses by providing a giant shop window that accesses a much larger audience.

Traditional agents will fight back

However, the appearance of up-and-coming hybrid agencies such as Purplebricks, offering lower fees to property sellers, could force further change. It could mean traditional estate agencies need to accept lower fees, which could lead to a need for them to cut costs by downsizing their shop estates.

I don’t think we’ll see the collapse of the traditional estate agent sector because local service will always be required from agents with boots on the ground. For example, properties don’t value or photograph themselves and buyers often need an agent present at viewings if a home is empty.

Rather than disappearing in the face of an onslaught from discounting competition such as Purplebricks and others, I think the traditional estate agencies will adapt and meet the challenge head-on. If that proves to be the case, would it be nuts to pay too high a price to buy online operators such as Rightmove and Purplebricks?

Growing, but expensive

The name Rightmove is as familiar to many in Britain as the name Google. Most people’s search for a new home involves visiting the UK’s largest property portal and most estate agents find it essential to their businesses to list their offerings on Rightmove.

The company’s success shows in a multi-year record of double-digit growth in earnings and a share price that has delivered investors a 2,290% increase since the end of 2008. However, at today’s 3,996p share price, the forward price-to-earnings ratio is around 26 for 2017 and the dividend yield just 1.3%. City analysts following the firm expect earnings to grow by 10% this year and by 14% during 2017. Growth remains on track but investing in the firm now seems risky because any slip in forward earnings could cause the shares to down rate from the current lofty valuation.

Rewriting the rules

Meanwhile, Purplebricks is growing revenue like mad, up 777% for the six months to the end of October compared to the year before. However, the firm is yet to make a net profit and ploughs a big chunk of its cashflow into administrative and establishment expenses. The firm sees itself challenging traditional estate agents nationwide with a strategy combining experienced and professional local property experts with technology to help make the process of selling, buying or letting more convenient, transparent and cost-effective.

Since listing on the stock market in December, the firm’s shares are up around 50% at 157p, which gives Purplebricks a market capitalisation of £376m — more than 52 times the recent half-year revenue figure.

Purplebricks’ valuation looks rich and I wonder if a proliferation of similar hybrid agents or traditional agents transforming their operations may move in to compete with the firm. That’s a risk I’m not prepared to take, so I’m avoiding the shares along with Rightmove’s.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.