Is Purplebricks worth £1.1bn?

Tuesday, May 30 2017 by
12

Purplebricks Group (LON:PURP) has taken the stockmarket by storm having listed at 100p in December 2015 the share price is now over 400p. The company has 270.6m shares giving it a market value of £1.087bn.

The business model is as a hybrid estate agent with a "local property expert" combined with an online estate agency service. This is meant to provide "the best of both worlds" and differentiates the group from other online estate agents. This model means that the group prices its services above that of online-only agents but substantially below traditional estate agents. Home owners don't have to deal with home buyers directly and can obtain the advice of the local agent.

Purplebricks has run an extensive advertising campaign in the UK and built up market share ahead of online rivals. Looking around the UK and the Purplebricks for sale sign has become increasingly ubiquitous. The group has also moved into Australia and plans to expand in the United States.

In the six months ended October 2016 the group generated revenue of £18.7m with nearly all of this from the UK. At first glance the circa £1.2bn market value looks pretty punchy.

Long-term success is not a given with expansion in the US yet to be proven. In my view, Purplebricks is essentially a service company with it advertises client property on portals such as Rightmove in the UK.  In the long-term the group appears to have few means to generate high returns and see off the competition. Looking at the four competitive moats:

Intangibles - Yes Purplebricks has a strong brand but that is only due to an advertising campaign. A new entrant could simply advertise to get people to sign up. The group does have a first mover advantage. But we have seen countless examples where the first mover has fallen by the wayside.
Cost advantages - the main advantage is spreading the fixed admin cost and the cost of marketing. Marketing costs are a barrier to entry to, for example, in the price comparison sector.  It is perhaps the biggest barrier to entry in this area.
Switching costs -  Property sales are a one time transaction and as such there isn't a long-term relationship.
Network effects - This is probably the most important competitive moat and Purplebricks doesn't appear to benefit from it. It is the platforms that benefit from network effects.

Competitive dynamics - A property seller can easily use emoov, housesimple or any of the other cheaper online agents than Purplebricks. Alternative online platforms do mean conducting the viewings yourself but the costs are also lower than Purplebricks. However, with an online agent you pay whether or not you sell a property.  There is therefore an incentive to go with the lowest cost firm.

Looking in my area (N1) and I had to go to the third page of Rightmove to find a property advertising on Purplebricks. Are Purplebricks better than traditional estate agents?  With online agents like Purplebricks you pay a fixed fee even if you don't sell the property. I think this puts the seller in a weaker position with the buyer knowing they will be keen to sell i.e. otherwise they have paid a fee for nothing.   A local estate agent will only charge in the event of a sale and will be able to offer advice.

Purplebricks is suitable for part of the market but I think it will probably hit a limit at some point. People in a chain will value a successful sale more than they do paying an estate agent's fee. High value properties are also typically able to negotiate down the estate agent's fee.

With regard to US expansion and I find it hard to believe that a country as entrepreneurial as the US has left such a big gap in the market. It is notable that a number of Purplebricks directors sold their shares recently.

To justify the current market value the group would need to make net profit of £50m to £100m. In my view, the company is in the catch 22 position that many fast growth companies occupy.  If it is successful and sees rapid growth it will then see a step up in competition. With few barriers to entry returns will fall back and market share will most likely be lost.

The same catch 22 is in place with electric car maker Tesla.  If the electric vehicle does grow significantly then the group will see competition step up.  We shouldn't extrapolate Tesla's early success given that there aren't any meaningful competitive moats in electric vehicles.

Purplebricks is not an attractive risk/reward investment in my view. There are better investments out there. This is a stock afflicted with "internet" and "growth" hype.  The company will no doubt report significant growth going forward but competition is also likely to become more intense.  This will put pressure on both fees charged to sellers and the company's market share. 


Filed Under: Financials, Short Selling,

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Purplebricks Group plc is a United Kingdom-based company engaged in the business of estate agency. The Company operates through the division of providing services relating to the sale of properties. The Company uses technology in the process of selling, buying or letting of properties. The Company operates in the United Kingdom. more »

LSE Price
331p
Change
6.8%
Mkt Cap (£m)
899.8
P/E (fwd)
n/a
Yield (fwd)
0.04



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51 Posts on this Thread show/hide all

shipoffrogs 28th Aug 32 of 51
3

Doesn't Purplebricks merely exploit an artificially created niche.

Rightmove have largely reduced the house sale process to a few photos and a description uploaded to an exchange. But only Estate Agents can list.

Purplebricks seems to be a halfway house between DIY and a full professional service. It's long term prospects must depend on Rightmove continuing to restrict listing to agents - something Purplebricks is partially undermining.


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ratioinvestor 28th Aug 33 of 51

shipoffrogs - you cann't advertise as a private person on the property portals. But you can through an online estate agent or a high street agent. Ostensibly this is because of rules for data accuracy. I don't think there is anyway that Rightmove or the other portals could stop online agents advertising. This would be anti-competitive. They appear to be able to stop individuals advertising though. I don't think the legality of that has been tested.

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shipoffrogs 28th Aug 34 of 51
1

Ratioinvestor - my point was just that I think Purplebricks' biggest strength is that it's currently the cheapest route to a listing on the property platforms. If individuals could, in the future, list it falls between a rock and a hard place.

Platforms are about bringing buyers and sellers together with lower frictional costs than in the past - I'm sure it's a process that is still evolving.

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andrewdb 29th Aug 35 of 51

In reply to ratioinvestor, post #18

The debate on how truly disruptive Purplebricks (LON:PURP) is to the real estate business model is probably the most relevant. I am not convinced this is an Uber or an AirBnB but then I don't know much about real estate other than having bought and sold houses: to my mind the relatively low transactional volume (compared to hotels or car rides) would probably limit the radical nature of the disruption.


Completely agree
and

Uber/ AirB&B own their respective directories

With Purplebricks,  In the UK, rightmove owns that.

All you need is for "Redbricks" to replicate Purplebrick's business model and do it for 10% less.

(according to some Uber is doomed for the same reason but in this case the incumbents are actually lower cost than Uber - once you take Uber's running losses into account)

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Howard Adams 3rd Sep 36 of 51
2

Hi Purplebricks (LON:PURP) , LSL Property Services (LON:LSL) & Savills (LON:SVS) holders (I do not hold any of these)

This might interest you if you have not already spotted it.

Another online estate agency story building here.

http://www.telegraph.co.uk/business/2017/09/01/online-estate-agent-yopa-raises-excess-27m-expansion-continues/

https://www.investegate.co.uk/lsl-property-servplc--lsl-/rns/strategic-investment-in-online-hybrid-estate-agent/201709011805476562P/

http://www.propertyindustryeye.com/newsflash-lsl-announces-20m-investment-into-savills-backed-yopa/

Read some of the comments at the end of the last article ….. commentators are NOT impressed !!!!

Regards
Howard

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paraic84 3rd Sep 37 of 51
1

In reply to Howard Adams, post #36

Thanks v much Howard.

Interesting to see if this additional fundraising helps Yopa. They are far behind Purplebricks (LON:PURP): as at 14 June 2017 Purplebricks (LON:PURP) had 14,248 properties for sale on Zoopla compared to Yopa's 2,432 (according to the Purplebricks (LON:PURP) end of year results investor presentation). Also worth remembering that Purplebricks (LON:PURP) increased its share of the online portal market from 62% to 72% last financial year. So far it doesn't have a serious UK online/hybrid rival.

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extrader 3rd Sep 38 of 51
1

Hi all,

Shipoffrogs wrote ...

I think Purplebricks' biggest strength is that it's currently the cheapest route to a listing on the property platforms. If individuals could, in the future, list it falls between a rock and a hard place.



Platforms are about bringing buyers and sellers together with lower frictional costs than in the past - I'm sure it's a process that is still evolving.

We have friends in Spain who used to be conventional estate agents until they saw the writing on the wall, they now run what I can only describe as a brokerage : they have portals to all the internet - based UK Spanish property companies and , for a flat fee of about £250 for a year, they give the house -seller in Spain access to that. It's left up to the seller to 'market' his house, photos , description etc and field any enquiries. Some people might not be comfortable on that score, of course - and would still want some degree of 'hand-holding'. But AIUI, Purplebricks doesn't offer that, anyway.

The owner obviously knows specifics re running costs, local amenities, competent local tradesmen etc where an estate agent would only add friction. The younger, internet-savvy generation should take it up readily. in due course. If they ever have a property to sell, of course.

But that's another story  ;-<


ATB

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ratioinvestor 19th Sep 39 of 51

I always thought PurpleBricks to be decidedly dodgy and manipulative. I think the Trusted Advisor reviews are fixed. Here is some evidence of that from another review site:

https://www.allagents.co.uk/purplebricks/

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oscar247 19th Sep 40 of 51
1

In reply to ratioinvestor, post #39

ratioinvestor - fully agree with you! Here is further proof of what a decidedly dodgy outfit they are.......

https://www.shareprophets.com/views/31639/breaking-purplebricks-fascist-lawyers-letters-backfire-as-its-removed-from-allagentscom

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paraic84 19th Sep 41 of 51
3

Those review sites can work both ways. A lot of traditional estate agents are understandably very anti Purplebricks (LON:PURP) so I wouldn't be at all surprised if some of the negative reviews on allagents are fake (as Purplebricks (LON:PURP) has implied). And frankly, estate agents are not held in high esteem so who cares if some people have had a bad experience of Purplebricks?! The fact is they are about to become the biggest estate agent in the UK by number of vendors.

That said, it is a bit suspicious that Purplebricks (LON:PURP) , as well as many other companies, have such high ratings on TrustPilot. I don't think they have loads of fake reviews but I am wondering if Purplebricks (LON:PURP) point customers towards the website at a certain stage of the process when they know customers will be happier for example. I wouldn't be surprised if there is some kind of newspaper or BBC investigation into TrustPilot at some point that throws up all sorts of questions about how companies can play it to get maximum ratings.

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JohnEustace 19th Sep 42 of 51

In reply to paraic84, post #41

The chap who painted the outside of my house waited until I said I was happy to give me the card to send off to a rating site with the words " Fill it out as you see fit, but five stars does help."
So the whole online rating game is just that, a game as far as I can see.

The first Netflix Black Mirror episode (Nosedive) summed it up well.

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ratioinvestor 19th Sep 43 of 51
5

paraic84 - I understand where you are coming from but I think the evidence shows that this isn't the case. If you look at other online agents on Allagents and they don't get deluged with negative reviews. Emoov for example. So I think the idea that other estate agents are deliberately undermining online agents isn't true. It could be the case that they are just undermining Purplebricks. However, the poor reviews for Purplebricks on allgents are corroborated by the Watchdog show and the BBC radio show covering the company.

I don't really understand what you are trying to say when you say they are "about to become the biggest estate agent in the UK by number of vendors." I.e. that they are a good investment based on this fact? Netscape was the biggest web browser but where are they now? The key for Purplebricks is their reputation and I think people now do look on google to find reviews and opinions. They will now see some negative TV programmes about Purplebricks. Amazing how all the fairly "dumb" brokers have pumped up this company.

It is fairly obvious that Purplebricks are manipulating TrustedPilot.  It is also now clear that they have used legal means to shutdown independent reviews at Allagents.  As I have said previously, this company is largely based on a false premise.  Their "local property experts" are really just sales people and as Watchdog showed often have no local property knowledge.

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ratioinvestor 19th Sep 44 of 51
4

I think Purplebricks will crash when its UK market share starts to weaken versus online competitors. This will probably happen soon. Not sure Australia and the US will be successful. I think in the US they will have bitten off much more than they can chew.

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paraic84 20th Sep 45 of 51

In reply to ratioinvestor, post #43

"However, the poor reviews for Purplebricks on allgents are corroborated by the Watchdog show and the BBC radio show covering the company."

No they're not. The Watchdog show was not a serious allegation. They alleged two main things. Firstly that Purplebricks (LON:PURP) was making exaggerated claims about the amount of money made (the methodology for the calculation couldn't quite be justified). The company has put those right and frankly customers can work out for themselves quite capably how much they can save. Secondly, Watchdog alleged the deferred payment option required vendors to enter into an agreement with Close Brothers which they weren't always aware of. But it's always been crystal clear on their website so the customers mustn't have properly bothered to understand. Furthermore, the deferred payment does not involve interest so a decent offering.

The overall point I am making is that complaints and poor reviews don't mean the company is failing. The whole estate agency industry is absolutely terrible in my view. Estate agents are among the least trusted professionals according to Ipsos MORI. Hence why I didn't think Watchdog would make any real difference. People use estate agents so infrequently that good customer service matters less than in industries where there is more regular interaction with customers (e.g. supermarkets). I don't see that Purplebricks (LON:PURP) are any worse than the rest of them.

Ryanair has a bad reputation but they are still an industry leader because they are cheap and convenient.

The bear case for Purplebricks (LON:PURP) for me rests on whether it is over-valued, not these other issues which are just distractions.

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Graham Ford 20th Sep 46 of 51
1

It seems to me that, given the nature of the estate agent trade, agents seek to big themselves up and do others down by a variety of means some of which are barely ethical. Have Purplebricks manipulated their Trustpilot ratings? Quite possibly. Have other agents posted fake reviews on allagents? Quite possibly.

When Purplebricks were starting out their local property experts were probably thinly spread and so not really local experts. Now they have scale their LPEs are probably on the whole more detailed in their expertise. So, the complaints about them not having local knowledge is probably out of date.

I'm a bit mystified by the complaint that LPEs are sales people. The people working in the high street agents are also sales people.

However, competition is building in online estate agents. I saw TV adverts for Yopa and Easyproperty just the other day. While Purplebricks has first mover advantage and a big marketing spend the competition will be chipping away at their lead, particularly while management attention is more on trying to get America up and running successfully.

http://hoa.org.uk/advice/guides-for-homeowners/i-am-selling/how-do-i-lower-my-estate-agent-fees-use-online-agents/

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ratioinvestor 20th Sep 47 of 51
2

paraic84 - Ok I'd agree to disagree. Watchdog did allege overzelous advertising and the company has had complaints upheld against it by the ASA. I don't really agree with your assessment. Many people do take the savings advertised at face value. I think you and I wouldn't but a lot of people do fall for marketing spin.

I agree that deferred payment is a red herring. However, a key thing from Watchdog is that this "hybrid" model that Purplebricks is promoting to justify their premium pricing is bogus. The local property experts were in reality sales people.

I agree that Watchdog might be partly anecdotal but it reinforced my view that TrustedPilot reviews have been manipulated by Purplebricks. This is further reinforced by the legal action the group kept on taking against Allagents.

Of course your point is literally true that poor feedback doesn't mean a company is failing. However, I think if the service offered is poor and doesn't justify the premium price than this is an issue. The reality is that Purplebricks has rallied in share price terms due to increased market share in the UK. If this started to reverse the stock would tank. I personally can't see why a rational person would use Purplebricks given the cheaper competition. Most people looking for services now would look for reviews. For Purplebricks now a google search throws up Watchdog, other BBC investigations and the legal action against Allagents.

From the relatively unbiased reviews on Allagents I think that your assertion is likely to be incorrect. Purplebricks do appear to be worse than other online agents. They have over marketed in the past, over promised, have premium pricing and the local property experts appear to be just glorified salespeople.

For me the bear case rests on Purplebricks losing market share in the UK. So these issues are relevant and in my view aren't just distractions. I wouldn't build a bear case on something just being overvalued as that is generally a dangerous strategy - at least in my view.

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paraic84 21st Sep 48 of 51

Someone on Twitter worked out that 28% of Purplebricks (LON:PURP) customers leave reviews on TrustPilot which seems quite high. Maybe suspiciously high? Or perhaps there is just a very high level of satisfaction. The thread also has useful information about their market share based on Rightmove (LON:RMV) data: https://twitter.com/DangerCapital/status/910499375281033216

It's good to debate. Purplebricks (LON:PURP) are providing an update to the market on the 29th so perhaps we'll have more to chew on then.

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dangersimpson 21st Sep 49 of 51
4

In reply to paraic84, post #48

I'm someone :-)

The 28% does seem high but not out of the realms of possibility so I'm not passing any judgement on that figure.

What I do find strange personally though is how much emphasis Purplebricks (LON:PURP) put on their trustpilot score in press announcements and RNS's. Particularly given that their current score of 9.5 doesn't appear that good compared to the best companies in other industries & was only 18th best for estate agents last time I checked. I personally think they would be better off not mentioning it. When they were small it gave investors some insight into performance. As a £1b+ company it starts to appear a bit amateurish in my personal opinion.

They also seem to have maybe scored a bit of a PR own goal with another popular review site and got their rating first suspended and then made inactive by threatening legal action rather than working with the site to remove fake reviews (if the statements made by the all agents site are in fact correct) :

https://www.allagents.co.uk/pu...

In my analysis of Purplebricks (LON:PURP) vs Rightmove (LON:RMV) data - I simply took the top 20 UK cities and compared the Purplebricks (LON:PURP) properties for sale excluding SSC on their website and those on rightmove.

59c3b620d49ddpurp.png

Of course the actual market share may vary from this for a number of reasons:

- areas they define as a particular city may not be exactly the same
- properties may cycle through the sites at different rates
- The top 20 cities in the UK only cover less than 25% of the overall UK population.

For this reason I think the interesting data will be to track these figures over time rather than rely on the current absolute figures since it may give some advance information on how well Purplebricks (LON:PURP) are growing their market share and if they are improving penetration in areas they appear to have lower market share like London, East Mids & North East.

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dangersimpson 21st Oct 50 of 51
5

This month's Purplebricks (LON:PURP) data:

59eb8579dd37epurp2.png

Similar when including SSTC:

59eb862902244purp5.png

The percentage of SSTC as a percentage of total for sale incl. SSTC is similar on Purplebricks (LON:PURP) to Rightmove (LON:RMV).

2 months is very limited data but on this measure it does look like Purplebricks (LON:PURP) have not grown any significant market share over the last month.

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