It’s been a rocky few months for investors in Purplebricks (LSE: PURP). The online estate agent has been hit by a wave of negative publicity and, despite its best efforts, management hasn’t been able to stop investors heading for the exit.
Year-to-date, the shares are down 46%, underperforming FTSE 100 by a shocking 37% over the same period, and that’s excluding dividends.
Including dividends, the stock has underperformed the FTSE 100 by just over 40% this year, a shocking retreat by what was one of the UK’s hottest growth stocks only a few months ago.
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What’s gone wrong?
As my colleague Royston Wild noted at the end of last month, it seems the investment community is concerned about Purplebricks’ expansion programme.
While breaking into new markets is never a bad thing, Purplebricks is trying to conquer the world before it has consolidated its position here in the UK. Even though the company does control 70% of the online estate market, the digital market is still a fraction the size of the overall UK market for buying and selling homes.
Earlier this year, analysts at investment bank UBS claimed that while Purplebricks claims to control a sizable share of the online market, sales on its platform account for less than 4% of the overall UK residential property market. That said, in a trading update issued by the company today, Purplebricks tells investors it has made further market share gains in “what are challenging market conditions in the UK real estate sector,” although it fails to provide exact numbers.
International growth
However, the company’s global ambitions should help it reduce its dependence on a struggling UK market.
Today, management announced yet another international deal, this time in Germany where it’s coupling up with media giant Axel Springer. The two businesses are forming a joint venture to acquire a significant stake in Homeday, Germany’s leading online real estate portal.
Homeday joins the stable of international businesses acquired by Purplebricks over the past few months, including the Canadian business Duproprio/Comfree.
In addition, the firm is rapidly expanding into the US market. It now operates in seven states across the country. These businesses are still relatively small in revenue terms compared to the UK home market, but there’s tremendous potential here. The US market is the largest in the world for buying and selling homes, and even if Purplebricks can grab just a few percentage points of market share, it could make a significant impact to the company’s top line.
In the meantime, however, I think shares in the company could fall further before finding support so perhaps we’ll have to wait a while until the share price can hit 200p.
So far, Purplebricks has been unable to prove to investors that it can function profitably and, until it can, I think the market will continue to view the business with a degree of scepticism. After all, international expansion is all well and good, but if the growth doesn’t produce any profit, it’s only destroying value for shareholders.
