Shares in Purplebricks Group (LSE: PURP) crashed 8% in early trading today despite reporting 150% revenue growth. Despite this rampant expansion, the company still lost £8.3m at an operational level in the first half of 2018 after generating £46.8m in revenue.

The company continued its recruiting drive, increasing the number of local property experts to 650 in the UK and 105 in Australia to cope with its burgeoning portfolio.

It has clearly disrupted and revolutionised the UK and Australian property sectors and has its sights firmly set on US next. Its American dream is progressing ahead of schedule: the company already has a presence in LA and now expects launches in San Diego, Sacramento and Fresno in January next year.

Great expectations

With momentum firmly on its side, many investors are clamouring to buy shares, but I fear the heady valuation attached to this lossmaking business could prove a dangerous entry point for would-be shareholders.

Right now, the company is valued just shy of £1bn. That’s a massive sum for a business whose losses seem to be increasing, rather than contracting. If we take analyst forecasts of £97m in revenue for 2018, then the company trades on a demanding price-to-sales ratio of roughly 10 times at the time of writing, despite a forecast full-year loss of £12.7m. 

Putting the valuation aside, there is no guarantee that Purplebricks will be able to maintain its furious expansion. Perhaps the most prominent criticism of the online estate agent is that it has little motivation to help sell a property because it receives payment regardless of outcome. A number of bad reviews on the website allAgents complain about poor customer service and a low frequency of viewings. 

The review website has been in a long-running legal battle with Purplebricks over the validity of these customer complaints, which I find disconcerting. allAgents director Martin McKenzie described the legal action as “the bully-boy tactics of a company unwilling to deal with the concerns of genuine customers”. 

This, combined with the fact that Purplebricks does not release sales figures does not inspire confidence. The company clearly completes sales – in the first half it completed on £4.6bn worth of property – but I believe a more transparent approach would empower sellers to make informed decisions. Is the firm worried that revealing these rates could deter would-be customers?

Other obstacles await

Additionally, entering multiple new geographies necessitates expensive brand-building that could hold back profitability for a while yet. The company spent £12.9m on marketing last year and this sum seems likely to rise going forward. 

My final concern is the state of the UK property market, which by all accounts has cooled off a little recently. Traditional brick-and-mortar estate agent Foxtons said it could face a “challenging” end to 2017 due to tough conditions in London. Admittedly, Purplebricks is likely better equipped to deal with a slowdown than other agents, but believing it could escape completely unharmed would be naive.

All that aside,with £64.4m net cash on the books, it has the financial firepower to see itself through a few more years of losses and I’d consider an investment in the company if the valuation wasn’t so demanding. 

The post Why I’d avoid Purplebricks Group plc despite 150% revenue growth appeared first on The Motley Fool UK.

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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.

This might be justifiable if the company had an excellent business model, but I’m not all that confident it does. Essentially, it is a website and the company cannot patent its processes. Its only discernible advantages are its size and first-mover status and I’m not all that sure they are sustainable. 

Copycat services are already springing up, including versions from established estate agents which I believe will drive down fees and increase marketing costs. If it isn’t profitable now, it could struggle to grow into this heady valuation under these conditions. 

Furthermore, Purplebricks gets paid upfront and this does not incentivise it to put any effort into selling a property. The company does not publish sales completion figures either and this makes me a little uneasy. 

It also frequently trumpets its impressive Trust Pilot reviews, but some calculations imply that up to a quarter of users are leaving reviews, an unprecedented figure. Most review websites follow the “1/9/90 Rule” where 1% leave reviews, 9% comment and 90% are passive readers. Other critics have also claimed that reviews on other platforms, such as Facebook, aren’t as positive as those on Trust Pilot. 

Maybe I’m overreacting to speculation here, but these concerns, combined with the excessive valuations firmly put me off Purplebricks. 

A safety specialist I’d side-step

Before I explain why I’d also avoid Premier Technical Services Group (LSE: PTSG), I’d like to point out the business has a lot going for it. It operates within mission-critical industries such as fire safety and fall arrest systems, areas where customers will pay up for quality, given the massive downside should systems fail. Furthermore, there are a lot of regulatory hoops to jump through if you want to operate in these fields, providing a barrier to entry for would-be competitors. 

There are also a lot of regulatory hoops to jump through if you want to operate in these fields, providing a barrier to entry for would-be competitors. 

Revenue grew a solid 19% in the first half. This growth, combined with 20% operating margins, attracted my interest when I first stumbled across the shares. However, receivables look high at £24m. That’s 10 times last year’s profits. 

I’m also a little concerned that founder Bob Morton has a somewhat chequered investment past. He is still involved in the company as a Director of Hawk Investment Holdings Limited, a company that owns 15% of PTSG.

Mr Morton has been reprimanded by the Takeover Panel multiple times and found himself on the receiving end of its worst possible sanction back in 2017 – the ‘Cold Shoulder’, which prevents FCA regulated bodies from acting for him for a number of years.

I do not wish to deride Mr Morton because I have not studied his career in great detail, but I would recommend that anyone interested in PTSG take his presence into consideration before making an investment. 

That, combined with the aforementioned high receivables, unfortunately, puts me off Premier Technical Services Group.

The post Why I’d dump Purplebricks Group plc and this fellow growth champion appeared first on The Motley Fool UK.

More reading

• Could this cheap FTSE 100 stock be the next Rolls-Royce?
• Hesitant over a Stocks and Shares ISA? Here’s a way to deal with scary markets
• Standard Life’s announced a £2bn deal but its share price is largely unchanged. Why?
• Up 12% in a month, Hollywood Bowl is a UK dividend stock on a roll
• Young investors are taking the stock market on a rollercoaster ride. Here’s how retirees can buckle up

Zach Coffell has no positions 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.