Why I'd avoid Purplebricks Group plc despite 150% revenue growth

Purple Bricks estate agent sold sign
Purple Bricks estate agent sold sign

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.

A quality pick emerges

Purplebricks' looks a little too risky for me then, but I'm more interested in a growth opportunity spotted by our top analyst.

The company in question is rapidly expanding internationally, is soundly profitable and trades on a reasonable valuation. In fact, the analyst behind the report believes the share price could increase four-fold if everythign aligns perfectly. To read the full investment thesis behind our top growth share, click here.

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.