Is it time to call the top on Purplebricks Group plc?
After hitting an all-time high of 525p on 8 August, shares in online estate agent Purplebricks Group(LSE: PURP) have since fallen by almost 20%. So what made this outperformer and stock market darling fall from grace so quickly?
The BBC Watchdog investigation into consumer complaints was most likely the catalyst. The programme criticised Purplebricks for repeating banned savings claims in promotional emails, which the advertising regulator had deemed to be misleading. And in a separate BBC Radio 4 You and Yours programme, the company also faced allegations over its use of controversial deferred payment services after customers complained that they had not been aware they were entering into a credit agreement with merchant bank Close Brothers, a third party.
Another reason for the decline in its share price was recent share sales made by senior management and the company's founders over the past few months. Although there is no indication of insider trading, the timing of the trades seems noteworthy in light of growing concerns about the slowing property market.
The property market has been one of the slower sectors to adapt to technology. Purplebricks, which charges a relatively small fee rather than commission on its transactions, is primed to take market share as the company's low-cost online offering disrupts the business model of the traditional estate agents. That said, it isn't the only disrupter in the market as it faces tough competition from roughly a dozen nationwide rivals, which include Yopa, Hatched, Emoov and Easyproperty.
What's more, much of the upside potential also appears to be baked into the stock's valuations. With the company making only £46.7m in revenue in the last financial year, its market capitalisation of almost £1.2bn means it is valued at a whopping price-to-sales ratio of 25. And despite this, the business has yet to turn a profit.
Instead, I reckon shares in Rightmove(LSE: RMV) could be a better pick. Fundamentals seems to be on a sounder footing for the online property portal, and the stock is tipped for great things on the earnings front over the next few years.
Following last year's impressive 18% uptick in its bottom line, City analysts expect underlying profits to rise by another 10% this year, with a further increase of 11% in 2018. So why are forecasters so optimistic.
As the dominant online property portal, with a market share of traffic across both desktop and mobile of 77%, Rightmove has made itself into an indispensable tool to marketing properties for both technology disrupters and traditional estate agents alike. Growth is underpinned by steady traffic growth, which drives increases in average revenue per advertiser, and in turn, earnings too.
The company is already generating serious cash flow and has recently used it to fund generous share buybacks and dividend increases. Last year, it returned £131.3m in cash to shareholders -- nearly 80% of its operating cash flow -- after paying a total dividend of 51p for the year and buying back 2.4% of its outstanding shares in issue.
Valuation are more attractive too, with shares in Rightmove trading at a substantially lower price-to-sales ratio of 17. And given that the company has an operating profit margin of over 75%, shares trade at a more reasonable price-to-earnings ratio of 28.8.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Rightmove. 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.