My conclusion back then was that, on top of being loss-making, the firm’s business is also cyclical, “and a cyclical downturn could put the company in an extremely precarious position if it arrives.” I viewed the stock as ‘risky’, and had no plans to buy.
More dire figures
Today, the company released its full-year results for the year to 30 April, and the figures are grim. Meanwhile, the share price has slipped down a further 35% or so since my December article, so I’m pleased to have avoided the stock. But what now? Is continuing to shun Purplebricks still the right decision? Let’s look deeper.
I’m discouraged by the numbers. Compared to the previous year, revenue rose 55% to £136.5m, which seems to be an outcome driven by the firm’s strategy aimed at grabbing an ever-increasing share of the market. However, the operating loss increased by 88% to £52.3m.
Call me old-fashioned, but what’s the point in that kind of trading? Imagine running a smaller business such as a corner shop like that. The firm is losing money hand over fist.
To me, there’s no point in increasing revenue unless the operating profit is rising as well. We could say that Purplebricks is effectively ‘buying’ its higher sales. Indeed, the cash in the firm’s coffers plunged by 59% during the year from £152.8m to £62.8m.
That money is gone from the balance sheet forever. I hope existing shareholders feel all the frenetic sales activity has been worth it. Maybe the enjoyment of watching the company’s funny TV ads and the brief warm glow that they got from reading about this year’s higher revenue figure is compensation enough for the plunge in the share price!
I think there’s a big flaw in the strategy
Is Purplebricks trying to follow the Amazon strategy? The US-based mega-company started off as an online bookshop and rapidly grew to sell just about everything. Famously, the company paid scant attention to profitability and focused on growing market share. For many years, Amazon remained loss-making but became profitable in the end after growing into a huge business.
But there’s a big difference between the two companies, in that Purplebricks is operating in a dreadful sector. Estate agency is notoriously cyclical and tied to the fortunes of the property market. I remember in the eighties, one particular downturn led to the call “retrain estate agents!” My view is the property market looks dangerous and I see Purplebricks as being in a precarious position.
Cyclical companies ‘should’ be making hay while the sun shines. So, right now, Purplebricks should be stuffing its bank account with cash from strong incoming cash flow. That’s because it will need it to survive the next downturn in the market, the possibility of which stands over the firm like the Grim Reaper, in my view. Sadly, the firm is doing the opposite.
I’ve run out of space, but you can read the rest of today’s report from the company here, for what it’s worth. Needless to say, I’m continuing to avoid the stock, at least until the operating loss starts to reduce.
Kevin Godbold has no position in any 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.