Online property agent Purplebricks (LON:PURP) today suffered a near 40% drop in its share price as it revealed today in a trading update the departure of two members of senior management alongside a significant revenue miss. The drop in share price was immediate today:
Amazingly this does not tell the whole story. In 2017 the share price almost exceeded 500p, and even at the start of 2018 it would have cost more than 400p a share. The unravelling of the share price has mainly happened in the past year and for holders this has been a poor ride.
The reasons for the nature of the fall lie with the company itself. Launched to much fanfare, Purplebricks allows people to sell their houses online without the need for an estate agent, therefore saving a great deal in fees (which traditional estate agents have in spades, having to operate offices and employ multiple people per office).
This looked set to be a classic case of a potential new entrant disrupting the market permanently, such as Rightmove did when it launched. And accordingly, the valuation attributed to it was equally vast: despite never making any profits (which is normal for early stage companies) the company was valued at over £1bn at its peak.
The markets seem to have fallen out of love with the share, and the losses have widened in the past few years, with an increasing amount of money being spent on marketing to attract new customers. And with traditional estate agents rapidly improving their online offerings and having to reduce prices, the whole viability of Purplebricks seems to have come into question.
This comes in a RNS today. This starts on a positive note:
Whilst the UK housing market has continued to be challenging for the estate agency industry, the Board still expects to report UK revenue for the current financial year of approximately 15-20% above the prior year. The Company also expects to maintain its 75% share of UK online instructions and for Purplebricks to continue to be the clear market leader in UK hybrid estate agency.
This is actually below forecasts: a broker note on Research Tree in December last month predicted a higher, c.30% jump. The online instructions market share is unsurprising given the real lack of competitors.
There are updates on international operations, namely the USA and Australia, and the message is the same: revenue expectations will not be hit, although it is not quantified by how much.
It seems that heads are rolling:
The Company announces that Lee Wainwright, UK CEO, and Eric Eckardt, US CEO, will shortly be leaving the business.
Vague reasons are given, which could read as they jumped before they were pushed.
The final bad news was saved for the end:
As reported at the interim results, the Company updated its revenue guidance for the 2018/19 financial year to £165-175 million under IAS 18. Given the reasons noted above, the Board believes revenue for the current financial year will now be in the £130-140 million range under IFRS 15.
It is rather surprising that these numbers were still being pushed by the house brokers in December. The IFRS is a bit of a red herring, as the previous mention of the effects of this on revenue is around 2%. So, this is a large miss.
Purplebricks is obviously still in an early stage of the business. Increasing house prices have made the saving of estate agents fees much more pronounced, and a £10,000+ saving is very material in today’s market. It is perhaps no surprise that they have grown quickly, albeit helped by marketing campaigns.
Their growth has been spectacular, but is showing signs of slowing:
This is despite an enlarged business fighting on four fronts: the UK, the USA, Canada and Australia. Whilst the model is proven to be taken up in the UK, revenue visibility for the other countries are uncertain.
What is also uncertain is the profitability of the business: the average user brings in just over £1,000 for Purplebricks. Other expenses are a huge expense at present, particularly in the overseas markets where there is little presence. There is huge operational leverage here: we can see that in the UK (the main market) that revenues are covering expenses, but this is not the case for elsewhere:
Canadian/German results appear here from the next year: the expansion into this territory is by acquisition, and such will deliver results better than the USA and Australia, but again with expenses will deliver a loss.
These aggregated results can be seen in the cashflow statement which reveals a little more about the financing of the company:
In the past year the cash decay has not been too bad, relative to the balance sheet. Today’s reduced forecasts have also reduced the projected cash as it translates into bigger losses, but there is still expected to be £54m by year-end. The company also have financed themselves with equity rather than debt as we can see from the share issues which financed acquisition.
This method might become a problem with the current share price. Back them £100m might have been roughly 10% of the market cap, today 10% would realise a lot less.
It is clear that Stockopedia doesn’t like this: it has a StockRank of just 5. At the moment, it looks like being right, although due to the cash pile it seems that the company will not be in serious strife for a while unless something remarkable happens.
There are a few things to consider here, and Purplebricks is certainly an interesting share. Serious growth has been anticipated by investors, and the results today have shown that this has slowed.
Some other worries are more fundamental. In another update, the company warned about the competitive response from other estate agents. In the same way that air fares became separable into specifics that customers could choose to pay for (or not), there is a wonder whether this type of product could go the same way. For example, an agency that offers much the same product but a lower level of service.
What is true is that the traditional estate agent model is dead: the amount of business gotten from people walking past the shops would now be negligible compared to those finding a property on the online portals. It would be these portals that deserve a higher valuation, as they have become natural monopolies. Not having a property on Rightmove, for example would be seen as a massive minus when selling a house.
Changing dynamics of the house markets also may become a factor. With increased times and number of viewings required to sell a house, the value of the saving by Purplebricks degrades as owners seeking the maximum saving have to do the viewings themselves (hosted viewings are available as a fee). There is also a general feeling that prospective buyers would prefer to view without the owners present.
It is clear that Purplebricks are juggling a lot of balls at the moment and now operates in several different territories. The question will be, what will happen when the advertising monies run out? No doubt that some customers have used them have saved money, but that is not going to be of comfort to investors unless this can be done profitably.
In my view, the advantages that Purplebricks have can be duplicated by traditional estate agents should they want to. And the overseas operations bring in some additional risk. The model has proven to be just about viable in the UK, but should this not happen elsewhere and the cash keeps on draining out, it could end in tears. 2/5.