Shares in online estate agent Purplebricks (LSE: PURP) crashed this morning following a downbeat half-year trading update. Is this penny stock one to avoid at all costs? Or should long-term Foolish investors like me be getting ready to pounce? Here’s my take. 

“More challenging” market

Buoyed by the stamp duty holiday introduced by the government, we’ve seen a post-pandemic boom in the UK property market. Today however, Purplebricks gave indications that the bubble — if we regard it as such — could be close to bursting.

New instructions have “slowed significantly“, making the six-month trading period to the end of October “more challenging” for the AIM-listed company. In fact, PURP estimated that the number of properties brought to market was roughly 23% below the same period in 2020.

To complicate matters, the firm has also been making adjustments to its business model over this time. A new pricing system has been introduced and staff have been brought in-house. While CEO Vic Darvey said he had been “encouraged” by results from this new strategy, it’s clear this isn’t apparent in performance just yet.

What now?

Confirmation of half-year numbers is expected on 14 December. Where the Purplebricks share price goes between now and then is anyone’s guess. Personally, I wouldn’t be surprised if the selling pressure continued, especially as the company expects the trading environment to remain tough.

Of course, there’s not much Purplebricks can do about the supply/demand imbalance. And even if the market is only pausing for breath as the colder winter months approach, bills will still need to be paid. As a result, the company now expects Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) for the full financial year will come in “below previous guidance“. That’s hardly encouraging stuff.

Penny stock perils

Today’s 35% fall in the Purplebricks share price leaves the stock trading at just 34p a pop. Had I invested when the company’s valuation peaked back in July 2017, I would have lost 93% of my capital, on paper.

If this isn’t a lesson on the need to stay diversified within a portfolio, I’m not sure what is. Sure, penny stocks have the potential to deliver life-changing returns over a short period of time. Purplebricks is proof that the reverse is also true and, I submit, far more likely. 

You might speculate that investor sentiment couldn’t get much worse and now might be the time to buy. I can see the logic in that. However, is a company that seems unable to grow investors’ wealth even when times are good, one I want to own when the (housing) market slumps?

Even if things do rebound, it’s clear PURP is needing to spend a lot of money to keep up to speed. Cash fell from £75.8m at the end of October 2020 to £58m last week. Ongoing investment for any business is inevitable. That said, I’m sceptical as to whether any of this will help Purplebricks truly distinguish itself in what remains an incredibly competitive market with increasingly digitally-savvy rivals.

One to avoid

I’d say Purplebricks’ purple patch is long in the past and unlikely to return any time soon. Having once owned the stock, it now goes firmly into my ‘avoid’ pile. As economist John Maynard Keynes once reportedly said: “When the facts change, I change my mind.” 

The post The Purplebricks share price just crashed 35%! Here’s why appeared first on The Motley Fool UK.

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Paul Summers 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.

A booming housing market has been good news for listed housebuilders, mortgage advisers and estate agents. And this is borne out by the latest full-year numbers from Purplebricks (LSE: PURP). But should investors like me be ready to take a stake in this growth stock? I’m not so sure… 

Rocketing earnings

Now, don’t get me wrong. The figures from the online estate agent were pretty encouraging.  Unsurprisingly, the number of instructions received by Purplebricks jumped higher, by 14%, to a little over 58,000 in the year to 30 April.

The average revenue per instruction received also increased by 7%. All told, this led the online estate agent to report a 13% rise in revenue to £90.9m. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) also rocketed 314% to £12m. 

On top of these numbers, Purplebricks said it would be launching a new pricing model this month, following a successful trial in the North West. Customers will be given the option of having their upfront fee reimbursed if they don’t sell their home.

However, since it’s too early to say how well this will be received, Purplebricks said it expected FY22 EBITDA would be flat year-on-year. This would be in accordance with what the market’s expecting. 

Unfortunately, the market doesn’t seem all that impressed with today’s news. Purplebricks’s shares were modestly lower in early trading.

Why might this be?

There could be a few reasons. For one, some investors may still be finding it hard to forgive the company for over-reaching itself in the early days by trying to capture overseas markets.

Yes, the share price is up almost 70% in the last 12 months as Covid-19 has been (almost) defeated. However, many small-cap growth stocks have experienced similar gains. Moreover, Purplebricks’ valuation is still 83% lower than where it was nearly four years ago. As a one-time holder, I’m just glad I departed with a profit back then. 

It’s also hard to say where the Purplebricks share price goes from here. Sure, there are things to be positive about. The UK housing market is hot and the new strategy could work. On top of this, Purplebricks’ finances also look pretty sound.

Following the sale of its Canadian business, it had £74m in cash at the end of the period. Like other firms, PURP has also repaid the furlough support it received (£1m) over the pandemic.

Against this, investors need to bear in mind the stamp duty holiday has now finished. Whether this leads to a fall in sales and a subsequent reversal in the housing market remains to be seen.

Regardless, CEO Vic Darvey’s goal of gaining market share and growing annual revenue by more than 20% in the medium-term won’t be easy. The environment in which Purplebricks operates remains highly competitive. Yes, effective marketing will help, but that comes at a cost.

Speaking of which, there’s also the opportunity cost for investors like me to consider. Why bet on a company that’s still to generate meaningful profits in an incredibly buoyant market when I can probably generate more-than-adequate returns for much less risk elsewhere?

Better options

Despite once being optimistic about its ability to truly disrupt a stale industry, I’m far warier of Purplebricks than I used to be. In my view, there are far more promising growth stocks to invest in. 

The post The UK housing market is booming, but I’d avoid this growth stock appeared first on The Motley Fool UK.

More reading

• Suddenly investors can’t get enough of GSK shares! What’s going on?
• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
• No savings at 45? Here’s how investors could still build a £17,360 second income
• How to invest £10,000 to aim for a £6,108 annual passive income

Paul Summers 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.