During the first half of 2017, shares in online estate agent Purplebricks (LSE: PURP) surged by 240% as investors bought into the company’s growth story. However, since the beginning of August, the shares have been on the back foot, and are currently down just under 30% from the August highs.
The question is, should you take advantage of this decline and buy into its growth, or should you avoid the stock ahead of further declines?
What’s behind the drop?
Investors have moved away from Purplebricks over the past few months for two principal reasons.
Firstly, the company has faced criticism regarding its advertising tactics. At the beginning of August, a BBC Watchdog programme claimed it had made misleading statements in an ad and had not been transparent with all its customers. Then during October, the Advertising Standards Authority upheld a complaint against the firm for misleading viewers over its fee structure.
Even though these developments led to unwanted negative publicity for it, a more substantial issue is overhanging the business: a property market slowdown.
Indeed, there are some signs that the UK property market is cooling and this is bad news for Purplebricks. Specifically, analysts are worried that as the market cools, sellers will be reluctant to pay the online agent’s upfront £1,000 fee. In a falling market, traditional agents, who get a higher fee, but only if the property is sold, might be more motivated to find a buyer.
Living up to expectations
Shares in Purplebricks have powered higher over the past two years thanks to optimistic growth forecasts. However, with headwinds building, it’s unclear if the group will be able to meet the City’s lofty growth targets.
For the fiscal year ending 30 April 2019, analysts are expecting a pre-tax profit of £9m, up from a loss of £11.5m for the year ending 30 April 2018. Even if the company meets this target, the shares are still trading at a 2019 forward P/E of 145, which does not leave much room for manoeuvre if things don’t go to plan.
That being said, the company is expanding overseas, and it’s here where analysts are expecting the growth to come from. The group has launched in Australia and is pushing into the US.
Buy, sell or hold?
At the beginning of 2017, Purpbricks was riding high on success and its planned expansion into the US. As the year has progressed, it seems as if investors have reconsidered their view towards the shares.
While the company does have enormous potential, there’s still plenty of work to do before it can claim to be the only portal worth considering if you want to sell your property.
With this being the case, it looks to me as if, over the past few months, investors have taken profits and reconsidered their expectations for growth. It might be a good time for growth investors to reconsider the company after this pull-back, but as mentioned above, Purplebricks’ current valuation does not leave much room for failure if that growth fails to live up to expectations.
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Rupert Hargreaves owns no share 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.