Why I’d sell Purplebricks Group plc to buy IQE plc

A more reasonable valuation, higher profitability and stronger competitive advantages lead me to choose IQE plc (LON: IQE) over Purplebricks Group plc (LON: PURP).

| 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.

It’s no surprise that hybrid online-offline estate agent Purplebricks (LSE: PURP) has taken the market by storm since listing in late 2015 with its disruptive business model, highly ambitious founder-led management team, and rapid expansion. But with the company’s market cap now up to a staggering £1.2bn I think now may be a good time for investors to reassess whether or not this is the time to buy its stock.

My main cause for concern is that with only £46.7m in revenue for the financial year to April, the valuation has already priced in several years of stellar growth. While the company could meet or exceed market expectations, this is always a dangerous game for retail investors to play as the stock price could fall dramatically were the company to report even a quarter or two of lower-than-expected growth.

And while its UK operations are now profitable, the group still recorded £6m in pre-tax losses overall last year due to lack of scale in Australia and the US and increased marketing spend as it pushes into these two markets. This situation is unlikely to change anytime soon as low brand penetration in these markets will require the same heavy investments that the company undertook in the UK in past years.

This isn’t to say management is wrong to expand as quickly as possible since its business model is readily mimicked and its first mover status is its only real competitive advantage. With £71.3m in cash on hand at year-end due to a recent rights issue, it shouldn’t run into problems funding this expansion for the time being.

But with a valuation that appears quite stretched I’d have a hard time justifying beginning a stake in Purplebricks right now. And, if I were a current shareholder I’d take a close look to see whether or not the company makes up an outsized part of my portfolio following its recent share price run up.  

The UK’s new tech champion?

I’d be much more likely to take a stake in IQE (LSE: IQE), which makes compound wafers for semiconductors. I prefer the company to Purplebricks because it is already profitable.And it has a much deeper competitive advantage with a market-leading position in key sectors, products that are based on its own patented intellectual property, and a customer base of well-known semiconductor manufacturers that are predisposed to stick with proven suppliers for many years.

The company’s outlook is also bright as its burgeoning photonics division takes off due to advances in laser technology and optical sensors that are being used in a wide range of industrial and consumer technologies, ranging from healthcare to smartphones and data centres.

In the half year to June double-digit growth from the photonics division contributed to a 16% year-on-year increase in wafer revenue and led group revenue for the period to rise to £70m. Growth looks set to ramp up in the coming quarters as management invests in expanding production facilities in preparation for mass market demand for its photonics devices.

With the company’s shares pricey at 34 times forward earnings there’s little room for error and I’d do my homework before investing, but I like the company’s wide moat to entry for competitors, rising margins, healthy balance sheet and enviable growth prospects.

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.

Ian Pierce has no position in any 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

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »