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Why I’d buy this top growth stock over Purplebricks

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A dominant force in the UK online market, AIM-listed hybrid estate agent and Neil Woodford favourite Purplebricks (LSE: PURP) is a superb pick for growth-focused investors with time on their side.  

Or is it? Recent share price performance suggests market participants are turning increasingly cold on the business and its plans to disrupt not only the UK property market but the US and Australian equivalents as well. Almost a year ago, the shares changed hands for 500p. Yesterday, they slipped below the 300p mark.

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Full-year results, released towards the start of July, have further dented sentiment with the company reporting that operating losses had quadrupled from the previous year as a result of heavy spending on marketing and the cost of expanding into new markets. Total revenue may have more than doubled to £93.7m, but that means little if the company isn’t expected to break even for another three years. Recent confirmation that Purplebricks had succeeded in acquiring Canadian real estate firm Duproprio/ComFree appears to have made even more investors question whether the company is running before it can walk.  

Having once been an enthusiastic holder, I’m not sure I’d buy the stock today. While I have no issue backing businesses that make little/no profit, so long as the promise of jam tomorrow isn’t completely illusory. I’m concerned that this ‘land-grab-at-any-cost’ strategy is actually impeding real progress and that the original business model must still prove itself before being replicated elsewhere. Following on from my comments in February, the fact that Purplebricks has now been cautioned several times over misleading advertising also doesn’t sit well with me.

While I may come to regret my decision years from now, I’d be far more comfortable investing in property portal Rightmove (LSE: RMV) currently. 

Market leader

A quick scan of today’s interim results for the six months to the end of June shows just how much of a commanding position the £4.6bn-cap is in.

Traffic to its site — which features details on 1.2m properties for sale or rent in the UK — was 5% higher compared to the same period in 2017, with a staggering 139m visits on average every month.

As a result of “continued growth” in Rightmove’s Agency and New Homes businesses, revenue climbed 10% to £131.1m. Underlying operating profit also rose 11% to £101m.

The fact that membership numbers remained stable at 20,450 provides further evidence of just how much of a stranglehold the company has on agents. Few would entertain leaving for the simple reason that it has become the go-to destination for prospective buyers. 

While still very much a quality growth stock, Rightmove isn’t averse to returning cash to its owners either. Today’s 14% hike to the interim dividend (to 25p per share) was accompanied with confirmation that just under £77m was handed back to shareholders over the interim period.

In addition to predicting average revenue per advertiser growth of £80 year-on-year (slightly higher than the £76 increase recorded over the first six months), Rightmove stated that it expected to meet management expectations for 2018, “despite muted sentiment towards the UK property market“.  Considering the sell-off in housebuilders and estate agents over recent weeks on fears that the market may have peaked (not to mention the concern surrounding Brexit negotiations), that’s likely to soothe most investors’ concerns.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. 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.

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