Over the past year, shares in online estate agent Purplebricks (LSE: PURP) have exploded higher as the company has captured the attention of growth investors. Over the past 12 months, the shares have added 232% making the company one of the best performing growth stocks trading on the London market.
There’s no denying that Purplebricks is a high growth company with large ambitions. Indeed, after establishing a strong foothold here in the UK, the firm recently embarked on a mission to try and crack the US market.
Ripe for disruption
The estate agent market is ripe for disruption, and Purplebricks has proved that there’s a demand out there from both buyers and sellers for a low-cost, online offering that also provides a level of human interaction. But the company isn’t the first to try and crack traditional estate agents’ hold over the property market. According to Which Magazine, there are currently 10 companies offering such services altogether. Competitors include Yopa, Tepilo, Settled, My Online Estate Agent, House Network, House Simple, Hatched, Emoov and Easyproperty. Interestingly, Purplebricks is one of the more expensive options charging £849 per property, compared to My Online Estate Agent which charges £395. That said, PB does offer a lot more for your money.
Lack of profits
City analysts don’t expect it to report a profit until 2019. For the fiscal year ending 30 April 2019, analysts have pencilled in a pre-tax profit of £6.5m on revenues of £168m.
As a low margin business, the company needs to achieve scale to boost margins and profits. Luckily, the UK and US estate agency markets are enormous so there’s plenty of room for the company to grow. However, competition is building, and the company might struggle to reach the level of profitability its valuation currently demands. Shares in the firm currently trade at a forward P/E of 346 for the fiscal year ending 30 April 2019.
Building a reputation
According to research from the Rightmove, only around 5% of people choose an estate agent based on price, the online agency’s chief selling point. The level of service and local knowledge was the most desired. Through its local experts, Purplebricks meets this need, which is something some of its peers do not. But the model isn’t exclusively available to the company, and it may only be a matter of time before competitors catch on.
Still, the company has the highest awareness among customers thanks to aggressive marketing campaigns, giving it a lead over competitors who may try and copy the strategy.
Runway for growth
Overall, the group has a long runway for growth ahead of it, and its existing headway over competitors give it an edge.
On the other hand, at present levels, the shares are extremely expensive, and while the company may be able to grow into its valuation, plenty could go wrong in the next few years that would send the shares crashing back to earth. Based on these factors, it looks to me as if it is a speculative play. It could make you a million, but it could also burn your fingers.
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Rupert Hargreaves has no position in any 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.