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Is the Purplebricks share price a falling knife to catch after plummeting 75%?

When I last looked at Purplebricks (LSE: PURP), what I saw was a company that was expanding very rapidly, pushing into new territories just about as fast as it could find them on a map, and burning masses of cash in the process. But not, as far as I could see, building any significant competitive advantage.

It has always looked like a classic bandwagon stock to me — the kind that gets its name well known, and investors pile in to what they see as a get-rich-quick opportunity. I’ve seen it time and time again over the years. I’ve seen them soar. I’ve seen them crash.

Investors had already turned away from Purplebricks, and the once-flying shares have now lost more than 75% of their peak value since July 2017.

U-turn

Then Wednesday we heard of a dramatic u-turn in Purplebricks’ strategy. Belatedly, the company has admitted what many of us have seen clearly for a long time — its headlong rush into new markets was too optimistic and too expensive.

With hindsight, our rate of geographic expansion was too rapid and as a result the quality of execution has suffered,” and “we have also made sub-optimal decisions in allocating capital,” said the announcement. It was accompanied by a rare apology for a poor performance over the past 12 months.

In the landmark update, the company said it is pulling out of Australia after two-and-a-half years. And in the US, to use Purplebricks’ own words, the firm is examining “options for delivering the next phase of growth in a more effective and cost-efficient way including more closely considering the opportunities and risks associated with a materially scaled back US business.”

Boss gone

On top of that, founder and chief executive Michael Bruce is to step down, which is hardly surprising — his position was pretty much untenable after Tuesday’s soul-searching missive.

But, with the shares down more than 20% since the shock announcement, are they now attractively priced or are they still to be avoided?

Neil Woodford was an early backer, and that’s probably encouraged a lot of private investors. But Mr Woodford did invest in the early days, before the full horror of Purplebricks’ overspending on marketing and over-stretching on the expansion front became clear. And he has been selling off Purplebricks shares over the past few months.

Bottom line

Revenue is expected to come in between £130m and £140m for the year to April 30, and the firm estimates cash balances at 30 April of around £62m.

Prior to this week’s news, analysts were forecasting two further years of pre-tax losses adding up to around £70m. And even a very small pre-tax profit of £0.8m in 2021 would translate to a bottom line loss per share. So we don’t have a lot of metrics on which to value the company — and I can’t help feeling we’ll see forecast downgrades now.

I’ve never been able to see what’s supposed to be so special about Purplebricks. Online presence just isn’t a big barrier to entry these days, and underneath it all, it is just an estate agent. I’m maintaining at least a bargepole’s distance.

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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.