People were seeing the shares rising rapidly and, not wanting to miss out, piling in without really understanding the company’s valuation.
That, in turn, was pushing the share price up further, and it can carry on like that for some time. But common sense eventually sets in, the fad passes, and the share price descends towards a rational long-term valuation.
Since I voiced my fears that it was happening to Purplebricks, the shares have fallen a further 27%. So how do you avoid jumping on, and falling off, bandwagons? I’d start by ignoring the marketing hype.
I don’t want to see big ad campaigns like the Purplebricks one. I want to see where a company’s profit is going to come from. And I want to have some way of relating the share price to that profit.
The property business is a very competitive one, and every company in it is getting paid one way or another, through commissions, fees, whatever. And I don’t see the “no commission” angle as a game-changer at all — folks selling their homes are going to weigh up the total costs of the alternatives.
Purplebricks is investing huge sums in an attempt at rapid international expansion, but a lot of investors are increasingly seeing it as too far, too fast, before it’s even come close to profitability in its home market.
While Purplebricks is certainly at the sharp end of the online estate agent business, it’s still tiny compared to the traditional market. And first movers are rarely the ones who reap the big profits.
Newcomer OnTheMarket (LSE: OTMP) has had a fiery start to life as a listed company, with its shares gyrating between 102p and 185p since flotation in June. As I write, we’re looking at a price of 141p, for an overall loss of 5%.
On Tuesday, the AIM-listed property portal announced a new deal with Belvoir Lettings. Belvoir is described as “the UK’s largest property franchise” and is set to list all of its residential sales and rental properties at OnTheMarket.com.
The tie-up will extend to shared marketing too, with Belvoir also set to “actively promote the portal brand with digital and branch-based marketing activity.” I don’t know much about marketing, but that sounds more cost effective to me than paying big money for people to shove their faces in cakes on primetime TV.
Both CEOs were, naturally, saying really nice things about each other’s companies, but I do see it as a pretty good move for both.
Would I buy OnTheMarket shares myself? Right now, no. But that’s simply because there are no profits on the horizon yet.
At the interim stage there was £24.3m in cash on the books, but forecasts suggest a pre-tax loss of £26.4m for this year and next, combined. I think OnTheMarket could do very well, but while there’s a likelihood of more funding being needed, I have no way of working out a fair valuation for the shares. I’m watching.
Alan Oscroft has no position 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.