A few years ago, the Purplebricks Group (LSE: PURP) share price soared above £5. But what happened next wasn’t nice.
Warning: The following share price chart might cause alarm for those of a nervous disposition…
Share price crash
The share price has crashed heavily, to as low as just 1.5p as I write. That’s a 99.7% loss from its peak. Eek!
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The latest news makes the key issue clear. It’s all about cash.
On 9 May, Purplebricks told us its payment processor for ‘pay now’ instructions had “exercised its right to withhold a portion of remittances“. That’s due to the firm’s financial position.
The board has been looking for a buyout to try to get the best it could for shareholders. But it now says that if it can’t conclude its attempts to sell the company soon, its cash could come under more pressure.
Tough business
The level of instructions didn’t rise in the fourth quarter as had been hoped. The year to 30 April should still be in line with prior expectations, but that’s for another year of loss.
Estate agent comparison site GetAgent.co.uk is offering £300 cash back on estate agent fees to worried vendors who switch to a new agent. And that won’t help the Purplebricks mood.
These are the latest woes, and the reason the Purplebricks share price has plunged more than 75% so far in May alone. But how do they tie in with the past few years?
Long-term problems
Purplebricks struggled to turn its early potential into profits. And its flat fee approach didn’t help the bottom line when house prices were rising in the years before the current weakness.
Competitors charging by commission were cleaning up, and Purplebricks needed to raise its fees. But at the same time, it was still struggling to get the customers it needed to generate bottom-line profits.
From those early days of big TV ad spend, Purplebricks had to move to cutting costs and preserving cash. It did make a very small profit in 2021, but fell back to a big loss again in 2022.
Jam tomorrow
So Purplebricks wasn’t able to turn its potential into profits and cash quickly enough. And when growth start-ups can’t do that, the cash can run out and the bubble can burst.
I really don’t know what might happen next for Purplebricks. The board has mentioned a possible equity fundraise again, but thinks it lacks the needed support. So it’s still considering its options.
The stock has a market cap of only £5.4m now. Just about anything could affect the shares of a company that small, which is why I stick to market caps of £50m and above.
A lesson
I have no idea what Purplebricks shareholders should do now.
But I do see a lesson we can learn. When a ‘jam tomorrow’ growth stock is making the headlines, I want some idea of how much profit there might be in the future, and when it should arrive.
Without that, it can still be a profitable investment. But there can be a lot more risk.
