The online estate agency industry is not near collapse and Purplebricks’ UK operations are “meaningfully profitable”, a commentator has said.
Analyst Mike DelPrete said that last week’s Purplebricks results showed an overall group loss of £27.3m for the first half of its 2019 financial year, with a slight reduction in full-year revenue guidance.
But, says DelPrete: “The top line numbers don’t come close to telling the full story (hint: it’s not as bad as it sounds).
“Purplebricks’ core UK market continues to grow and is meaningfully profitable, proving that the model works.
“Key performance indicators in its other three markets reveal a deeper story of investment growth, and challenges.”
He says that the popular narrative – that the entire online business model is near collapse – “is seductive but factually incorrect”.
He goes on: “Purplebricks is an international collection of businesses at various stages of growth. In the UK, Purplebricks’ most mature market, it continues to grow revenues and operating profit. At maturity and scale the business model absolutely works; there is no evidence to support otherwise.”
DelPrete does say that its rate of growth is slowing in the UK: “But at nearly 80,000 instructions per year, it can’t be expected to keep growing at historic rates. The key is that even in a challenging economic climate, growth continues.”
Purplebricks has had a “bumpy ride” in Australia, he says. There, it must execute a turn-around plan with a new team and pricing activity, after an $18m loss.
In the US, Purplebricks continues to invest heavily, spending over $20m in marketing and sales. It will also need to go from 200 to 650 instructions per month to break even, and to 1,000 to reach profitability.
Overall, says DelPrete, Purplebricks “is as much an advertising company as it is a real estate company”.
For every £1 spent on marketing, Purplebricks generates revenues of £3.60 in the UK, £0.92 in Australia, 0.36p in the US, and £4.38 in Canada.
He concludes: “The core Purplebricks business model – and profitability at scale – is sound. The market failure of smaller players, of the fact that Purplebricks is deeply investing in new markets doesn’t diminish that fact.”
DelPrete says that Purplebricks is willing to invest tens of millions year after year to build market share, incurring big losses along the way.
He queries: “If you’re a traditional real estate agency, or a listed company, are you willing to do the same?”
Meanwhile, another analysis questions whether Purplebricks shares should be snapped up at their current price.
On the Motley Fool website, aimed at investors, concerns are spelled out that revenue growth in the UK has slowed despite the increase in marketing spend.
Writer G. A. Chester says: “Purplebricks’ latest numbers look to me to provide a further indication of a trend towards this negative outcome. As such, the results only increase my doubts about the long-term viability of the business model.
“And with management in the process of spending tens of millions on aggressive international expansion, I continue to see it as a stock to avoid.”