- Purplebricks Group – LON:PURP
Share Price – 348p
Market cap – £944mn
As an owner of M Winkworth, I have been keeping a close eye on the competition in the estate agent business. For the most part, operators with the traditional High Street presence (Countrywide, Foxtons, M Winkworth, etc.) have struggled in the last year as a slowdown in the economy, stamp duty changes, and Brexit have all taken a toll in a market that may just have boiled over. Despite the slump in market activity and several profit warnings for the bricks and mortar operations; up and coming internet-only providers like Purplebricks have grown market share and seen their shares soar. With the share price up 3.5x from flotation only a year and a half ago, and with the traditional estate agents down about 50% – the market has taken a dim view on the future of M Winkworth, Foxtons, etc.
Clearly, a bet on M Winkworth in this market is clearly a variant perception and when taking this sort of position on the market, extra due diligence must be made.
Since Purplebricks truly is a start up, any meaningful analysis of the financials is going to be guess work to a large extent. We do have 2.5 years of results to examine (please note the 2017 numbers are from the recent interim).
The current broker forecast for full-year revenue for 2017 is at £42m and the most recent trading statement has suggested that they will beat that (of course they are going to beat their own forecasts). Looking at the most recent trading update, the company has said it expected to deliver positive adjusted EBITDA for the full year results.
As a result the UK business is expected to record an adjusted EBITDA profit for the full year, building on the UK’s £0.3m reported adjusted EBITDA in the first half.
This is interesting because it seems as the business scales up, it is still unable to deliver positive EBITDA, despite now having a meaningful share of the UK market (I estimate about 4%). I am sure the bullish argument will be that they are investing in marketing and building the brand. However, given the nature of the property sales business, it’s not sticky revenue that can be kept with a one-off spend on advertising. People only buy and sell property a few times in their lifetime, therefore Purplebricks will need to maintain their high adverting and marketing budget in perpetuity in order to retain market share.
There are a number of other red flags that go beyond the underlying financials.
Insiders have recently sold a substantial amount of stock.
The CFO has resigned recently after only being at the company for two years.
Purplebricks Group plc (‘Purplebricks’ or ‘the Company’) announces that Neil Cartwright, Chief Financial Officer, is to step down from the Board and will leave the Company due to ill health.
No profits now, nor likely this year. Heavy insider selling. A sky high valuation. A CFO resignation. Yet my strangest observation is yet to come.
The Curious Case of Their TrustPilot Review Centre
I noticed in their recent trading update for full year 2017, the company made mention of their excellent TrustPilot review scores.
Mentioning TrustPilot is actually something that they have done consistently in their trading updates, so naturally I was drawn to investigate this. I noticed a some strange anomalies.
Firstly, I was surprised at the sheer size of the volume of reviews that Purplebricks had received. To investigate the data in better detail (rather than having to manually wade through 900+ pages) – I wrote a small computer program that pulled the data.
The volume of reviews has increased as time has went by (you’d expect this as sales have increased). What does seem strange is just how many reviews are being generated. If we are led to believe that Purplebricks are doing about 5,000 instructions a month (their word for putting a property up for sale), then roughly 1/4 to 1/3 of customers are then going onto TrustPilot to give the company rave reviews. I find it a little unusual that people would get excited enough to do this for an estate agent.
Perhaps they get an incentive to post about their experience?
I dug deeper into the content of the reviews to see what else came up.
As you can see, I did not have to go far at all to find an oddity (the very first page of reviews entered today). A number of consecutive “5 star” reviews (this is the number in the third column) with the phrase “excellent service” consistently reproduced in the title of the review. Is the “excellent” adjective really so common really so common to be found on review sites, or did the data entry monkey just get bored?
Ordinarily, I don’t give much credence to online reviews in real life, and certainly not in investing as they have become mostly worthless for many reasons (lots of studies on Google around this). However, the interesting thing here is that management of Purplebricks have repeatedly drawn investors towards their excellent TrustPilot scores in their trading updates (here and here). Ignoring the fact that TrustPilot reviews have no place whatsoever on a trading update for a £1b company, the strange circumstances in which they seem to have been created certainly raises questions in my mind about this company.
Full disclosure – No position in Purplebricks. If anyone is interested in my dataset, I can make it available.