Is this high-flying property stock about to crash?
Since going public in December of 2015, shares of hybrid online estate agent Purlebricks (LSE: PURP) have rocketed 197% in value due to fast growth and huge long-term potential. But is disaster around the corner with the company still running a loss, embarking on ambitious overseas expansion and recently tapping shareholders for a £50m rights issue?
I don't think so. For one, its losses are narrowing rapidly. In the six months to October, losses were down to £2.7m versus £6.3m a year prior. And this loss was due to expansion into Australia as the core UK business is now profitable to the tune of £0.3m in EBITDA in H1 2017.
This may not be much, but it's a vast improvement on the £6m loss a year before, and shows that the company's business model does work. Add in the fact that it had £29m in net cash at period end and there is substantial room to continue investing in its growth without worrying about profits for some time.
While overseas expansion at this stage is risky it also represents the possibility of huge long-term gains. After launching in Queensland and Victoria in August the company already had 50 self-employed estate agents on hand and over £500k in sales in just the first seven weeks of operations. This tells us that Aussies are finding Purplebricks' low, fixed-fee pricing model as attractive as we have at home.
And although investors may balk at being hit up for £50m I reckon they'll be thankful in the long run as this cash is being used to fund expansion into the massive US real estate market that pays out some $70bn annually in commissions alone. While the company will need to invest heavily in marketing, the payoff is potentially huge as the US market is highly fragmented and commissions average 5%-6% per transaction. At this high price I find it likely sellers will find a fixed fee pricing model very attractive.
That said, would-be investors should exercise caution because at its current price, Purplebricks is highly valued, which is always dangerous when it comes to lossmaking disruptors. But if its strategy pays off as well as investors currently believe it will, then the future potential is very bright.
The schadenfreude is palpable
The rise of Purplebricks and other online estate agents has come at the expense of traditional agencies such as Foxtons (LSE: FOXT), whose share price has collapsed 40% in the past year. This drop was caused by an 11% year-on-year fall in revenue to £132m and 54% drop in profits in 2016 as the high-end property market cooled thanks to Brexit and new stamp duty charges.
And more problems are looming as the government's proposed caps or outright ban on charging letting fees to tenants threatens a part of the business that brought in £68m in revenue last year. This is especially harmful for the likes of Foxtons as letting revenue was supposed to be a non-cyclical fallback for the firm when the London property boom eventually went into reverse.
With its shares still pricey at 21 times forward earnings Foxtons is looking expensive to me considering the problems it faces in core markets as well as the longer-term threat from rivals like Purplebricks.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.