Purplebricks (LSE: PURP) has taken the UK stock market by storm – its shares have soared 175% over the last year – but I fear its heady climb might finally have come to an end. The company’s revenue growth has been outstanding, but despite pulling in £46.7m last year, it still failed to achieve an operating profit. Somehow, the valuation is still sky high. The shares trade on a price-to-sales ratio of 21.
This might be justifiable if the company had an excellent business model, but I’m not all that confident it does. Essentially, it is a website and the company cannot patent its processes. Its only discernible advantages are its size and first-mover status and I’m not all that sure they are sustainable.
Copycat services are already springing up, including versions from established estate agents which I believe will drive down fees and increase marketing costs. If it isn’t profitable now, it could struggle to grow into this heady valuation under these conditions.
Furthermore, Purplebricks gets paid upfront and this does not incentivise it to put any effort into selling a property. The company does not publish sales completion figures either and this makes me a little uneasy.
It also frequently trumpets its impressive Trust Pilot reviews, but some calculations imply that up to a quarter of users are leaving reviews, an unprecedented figure. Most review websites follow the “1/9/90 Rule” where 1% leave reviews, 9% comment and 90% are passive readers. Other critics have also claimed that reviews on other platforms, such as Facebook, aren’t as positive as those on Trust Pilot.
Maybe I’m overreacting to speculation here, but these concerns, combined with the excessive valuations firmly put me off Purplebricks.
A safety specialist I’d side-step
Before I explain why I’d also avoid Premier Technical Services Group (LSE: PTSG), I’d like to point out the business has a lot going for it. It operates within mission-critical industries such as fire safety and fall arrest systems, areas where customers will pay up for quality, given the massive downside should systems fail. Furthermore, there are a lot of regulatory hoops to jump through if you want to operate in these fields, providing a barrier to entry for would-be competitors.
There are also a lot of regulatory hoops to jump through if you want to operate in these fields, providing a barrier to entry for would-be competitors.
Revenue grew a solid 19% in the first half. This growth, combined with 20% operating margins, attracted my interest when I first stumbled across the shares. However, receivables look high at £24m. That’s 10 times last year’s profits.
I’m also a little concerned that founder Bob Morton has a somewhat chequered investment past. He is still involved in the company as a Director of Hawk Investment Holdings Limited, a company that owns 15% of PTSG.
Mr Morton has been reprimanded by the Takeover Panel multiple times and found himself on the receiving end of its worst possible sanction back in 2017 – the ‘Cold Shoulder’, which prevents FCA regulated bodies from acting for him for a number of years.
I do not wish to deride Mr Morton because I have not studied his career in great detail, but I would recommend that anyone interested in PTSG take his presence into consideration before making an investment.
That, combined with the aforementioned high receivables, unfortunately, puts me off Premier Technical Services Group.
I'd recommend you take comments from bearish investors seriously whenever you make an investment - I certainly do. If you can logically and calmly dismiss their claims then you will have strengthened your investment thesis.
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Zach Coffell has no positions 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.