Is Purplebricks worth £1.1bn?

Tuesday, May 30 2017 by

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…

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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 »

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81 Posts on this Thread show/hide all

dangersimpson 3rd Jan '18 62 of 81


I think Purplebricks (LON:PURP) will have slightly different seasonality to other agents. H2 which is to 30th April should be stronger because peak houses will be marketed March April and Purplebricks (LON:PURP) get their fee up front. Whereas traditional agents will have peak income on chain completions later in the year.

The point is that if my (admittedly limited being only top 20 cities) analysis is correct that the slow down has not appeared in the results yet since these are to October and the slow down happened post reporting period.

Their own guidance for UK revenue is only +10% for H2 on H1 so this wouldn't seem to be great given the seasonal affects that should favour H2.


I think the current strength of Purplebricks (LON:PURP) is related to Woodford buying. I note the statement that his third fund Woodford Income Focus has been buying:

we have been able to free up a small part of the portfolio to opportunistically capture some long-term capital growth potential for the fund, in stocks which are misunderstood by the market and which are therefore profoundly undervalued. As such, we introduced three new positions to the portfolio during the month, in the form of Allied Minds, Prothena and Purplebricks.

The cynic may argue that this decision may have more to do with year end mark- to-market reporting of the other Woodford funds that have big holdings in these stocks and have been performing badly this year.

Long term it is business fundamentals that matter more and to me these are little competitive advantage, questionable behaviour regarding reviews, portal management & advertising, and high market & regulatory risk.

Book: Excellent Investing: How to Build a Winning Portfolio
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dangersimpson 4th Jan '18 63 of 81

A small addendum.

According to holding RNS Woodford funds combined increased their holding in Purplebricks (LON:PURP) by1.27% in November 2017:

They could have added up to 0.69% without declaring but it seems unlikely that they would add up to the threshold and stop.

Based on the blog post:

...the holdings of Allied Minds, Prothena & Purplebricks were new holdings to the Income Focus Fund in November 2017.

Trustnet puts the current AUM of the Income Focus Fund at £738m which means that this fund added 2.3% of the equity of Purplebricks (LON:PURP) in November 2017. So we have at least 0.3% of the Purplebricks (LON:PURP) equity and probably closer to 1% that was transferred between funds. Most probably form the Equity Income Fund that was facing redemptions.

So it would seem that the Income Focus fund maybe be bailing out it's bigger brother both indirectly by supporting Purplebricks (LON:PURP) share price and directly through taking some of it's holding.

In the same way the income focus fund probably added about 0.9% of the Prothena equity and given Woodford's 29.9% holding already it is most likely that all of this came from the other funds.

If I was a holder of the Income Focus fund I would be most worried about this development since it is the presence of companies like this in the Equity Income fund that has led to the under-performance and maybe a lot of the redemptions. If redemptions continue they will be stuck holding the same highly priced, non-income bearing, illiquid stocks that the rest of the funds hold.

Book: Excellent Investing: How to Build a Winning Portfolio
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thirty fifty twenty 2nd Feb '18 64 of 81

is anyone able to get hold of the revenue recognition policy in PURP?
the web site has nice menu headlines re investors and presentations but none of the links work.
even the link below the CEO statement doesn't work.

they all send you to the RNS!!

is this deliberate?? surely not it would be unbelieveable if it was?

but as a basic it seems a very poor quality PLC website that doesn't take you to the Annual Report in a couple of clicks.

disclosure: i am short

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dfhscgfsd 2nd Feb '18 65 of 81

In reply to post #308563

Not sure about that particular policy, all the links seem to work though

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thirty fifty twenty 2nd Feb '18 66 of 81

below is Revenue recognition policy.....

"Revenues are recognised on the basis of the performance of contractual obligations and to the extent that the right to consideration has been earned and the flow of economic resources is probable.

Fees earned on instruction of residential property are accounted for at the point of publication of advert to property portals, the point at which the Company’s obligations are complete. Where property particulars have not yet been published to property portals, the fees are recognised as deferred income and presented within liabilities.

Conveyancing fees are accounted for on completion of the service being provided, being legal completion of the transaction. This may lead to the recognition of accrued income.

Fees earned under lettings contracts are recognised on a straight-line basis over the term of the agreement and/or at the point of delivery of the service as appropriate.

Accompanied viewings revenue is recognised when its receipt is assured over the period in which the Company fulfils its obligations."

So they book instruction fee when the add listed!
By their own definition they have no cntractual obligation to help sell the property!
i think their policy will be debated with new IFRS nest year on Revenue Recognition,
and it certainly is not good, or consistent PR!!
this could get fun...

PURP is in my top5 (short)

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thirty fifty twenty 2nd Feb '18 67 of 81

In reply to post #308628

the links send you to the RNS or similar summary information.

the links to Annual report just send you back to the RNS.
also the link beneath Chairman's statement just send you back to the RNS.

very shoddy!
at least we know they don't stalk these BB as it would have been fixed by now since my note this morning!

Revenue Recognition Policy below is from the 2016 Annual report - that link works :-)

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thirty fifty twenty 7th Feb '18 68 of 81

did anyone else have their short forced closed yesterday?
my short with IG was forced closed yesterday

it would seem like NW is calling the shots,
in innocence maybe the lender wants the shares back so they can sell them?
either way it is horrible to have such manipulation
but it does so they can in the terms - i just didn't think they ever would.....

so any short position in any company they can close out with no notice!!
why would i take the risk of any short again??
how IG prioritise who to call first?
i got no explanation as to why other than lender wants their shares back

it all adds to the smoke and mirrors of PURP

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dangersimpson 8th Feb '18 69 of 81

The disclosed purplebricks short interest is very low at only 3%.

So recalling shares is unlikely to have much SP impact.

The only real reason for recalling shares that have been lent is to sell them. So it would seem that a larger holder is looking sell.

We can guess that this is Woodford Funds due to the collapse of a number of his other key holdings £PRTA, AA (LON:AA.), Provident Financial (LON:PFG), Capita (LON:CPI). The drop in £PRTA has probably pushed the Patient Capital Trust over its borrowing limits and both Income Funds are down more than the market this year. So it would make sense if he had to sell.

I would not expect the market to take kindly to any NW sale though - he has been a vocal supporter of the company and willing to put money into the company at ever increasing prices. If he is now selling he represents a massive share overhang and a source of future funding being removed form the company. It will be a lot harder for the company to get their next fundraise away without NW willing to buy in size at any price.

We won't really know until an RNS appears though.

Book: Excellent Investing: How to Build a Winning Portfolio
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BlueFrew 8th Feb '18 70 of 81

In reply to post #312093

Hi thirty fifty twenty,

You stated "so any short position in any company they can close out with no notice!!"

I wasn't short Purple Bricks, however I have had similar happen a few times to me with other short positions. It's one of the risks that you have to take if you are going to short.

I've also had a situation where some borrow has been pulled, but not all, where I've been asked to reduce my short position by a certain percentage.

It's annoying, but you have to be sanguine about these things. Assuming it is Woodford that is selling (quite likely considering the state of his funds) then perhaps once those shares are sold, borrow will become available again. I've also seen that before, forced closure, wait a week, reopen as borrow became available.

I do think Purplebricks (LON:PURP) is a good short candidate at these prices if you can get borrow.

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dangersimpson 8th Feb '18 71 of 81

I ran these at the end of last month but didn't get chance to post.

Good news for Purplebricks (LON:PURP) is that their big tv advertising campaign drove higher market share in January to a level not seen since google trends interest started to fall off in October.

The bad news is that google trends data is suggesting that the bump in interest was shortlived. Also interest seems to be weakening in Australia. The level of google trend interest in California shows that they appear to have failed to make any long term impact there at all - which is probably why they have gone very quiet about this.  The New York launch seems to be an intention at the moment since there is no discernible google interest in the company in that location (as of 25th Jan when I captured these graphs.)

So something for the bulls & bears this month.


Book: Excellent Investing: How to Build a Winning Portfolio
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thirty fifty twenty 9th Feb '18 72 of 81

In reply to post #312378

hi BLuefew and thanks for the information.

Can i ask which companies that was in just to get an idea of the sort of companies it can happen to,
and what were the circumstances at the time....

i.e i see the forced close at PURP connected to the Jeffries research, the Dow falls on Monday and the collapsing PURP share price.

There has been limited borrow available on PURP since early December - which is surprising to me for a 1.4bn company.

I am not at all sure that the lender is Woodford.
I think it more likely he called in favours from other lenders

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BlueFrew 9th Feb '18 73 of 81

In reply to post #312948

The ones that stick out.

Petroceltic - Was forced to close on the 29th January 2016. Managed to reopen on the 2nd February at roughly the same price. As I recall borrow was quite tight. Took a bit to get a position open there. The incumbent management team were in a battle with Worldview. There were spikes and short squeezes galore. Blog posts stating categorically that Worldview would have to offer 120p or so for the shares. Worldview then offered 3p, were rejected, bought up all the debt that they didn't own and forced it into adminstration. Great fun.

Goldenport - Forced to close into a short squeeze. Price collapsed the next day after borrow had been pulled. Painful.

MySQUAR - Had to phone up to get this one on. Was made clear I was paired with another client who was long. Had to close when they sold. Did OK out of it though.

Telit - Forced to close when borrow dried up at the start of September last year. Have since reopened. It was difficult to open originally and difficult to reopen. Borrow was at a premium last year. Position isn't as large as I'd like though, as a significant chunk of their shares are on loan, so forced closure or a short squeeze is an ever present risk here.

There was one where I was asked to close part of the position, but I ended up closing it all as the rump wasn't worth the monitoring time. Looks like it might have been Kodal Minerals. Should learn my lesson and stop getting tempted into shorting some of the rubbish at the bottom end of AIM.

Purplebricks (LON:PURP) does look a tempting short but I'd guess the borrow situation isn't helped by the fact that Woodford holds nearly 30%.

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JohnEustace 9th Feb '18 74 of 81

Re Purplebricks (LON:PURP) shorts being closed. Isn't the simple explanation that the holders decided they wanted the shares back in order to sell them because they agree that they are overvalued?
No conspiracy required.

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Andrew L 27th Mar '18 75 of 81

Interesting Purplebricks (LON:PURP) update. In my view, they are admitting that momentum is flagging in the UK market. The fundraising to expand in the US is effectively admitting that it is tough breaking into new markets. This is a cash consuming business in terms of funding growth. I am amazed that Purplebricks (LON:PURP) persuaded this German media company to invest. It is just insane to me. They are already significantly down on the price they subscribed at.

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paraic84 27th Mar '18 76 of 81

I'm grateful to dangersimpson's previous data. He helped to show the slowdown in UK growth way before the admission from Purplebricks (LON:PURP) yesterday, helping to inform my decision to sell Purplebricks (LON:PURP) shares towards the end of 2017 and banking a very decent profit. Thanks buddy! My other slight concern with the announcement yesterday was the indication that the German media company would also buy some shares off the directors and there are still few specifics about how the US is going (e.g. how many instructions?). I still think Purplebricks (LON:PURP) looks like a good business - don't forget his has grown super quickly - but growth companies' share prices are unwinding at the moment and there is growing negative sentiment here coupled with concerns that it might struggle to get a bigger share of the market in the UK against other online competition.

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Andrew L 19th Sep '18 77 of 81

Interesting that they have put fees up in Aus I believe.

Yet another Woodford stock. Also Old Mutual Smaller Companies I believe. I wonder if that is Dan Nichols. I could never figure out the investment appeal of this company. Looks like it may all come crashing down.

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Andrew L 13th Dec '18 78 of 81

Down she goes. Some very high profile fund managers were or are in Purplebricks (LON:PURP). Amazes me as surely we have seen this movie before?

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andrea34l 13th Dec '18 79 of 81

I think the performance has been let down big time in Purplebricks (LON:PURP) by Australia, I reckon they have tried to roll out a model their which is too similar to, for example, the UK. Rollouts in other countries are fine in principle, but they surely have to also be specific to those regions. An operating loss which is substantially more than revenue indicates to me they are making slow progress here and, as a potential investor, I would want to wait for more positive indications here. An "all-inclusive fee of A$8,800" sounds VERY high to me.

I almost feel Woodford is the curse of death as of late with some stocks; his funds have not performed as well as his reputation would seem to indicate they should do as of late...

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dmjram 13th Dec '18 80 of 81

In reply to post #427093

It seems that Woodford was a decent large cap income investor who thought he could also be a good picker of growth stocks, both without the huge institutional support of his previous employer.

Evidence to date suggests otherwise.

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jonesj 13th Dec '18 81 of 81

Purplebricks (LON:PURP) are operating in a sector with zero barriers to entry and they do not benefit from a network effect.   One on line agent using Rightmove is just the same as another which also uses Rightmove.    I made a small profit on this a couple of years back, but see no reason to dabble in this when it is making losses, is on a price to sales ratio of 4.85 & has no moat.  

My previous profit is something I put down to luck, rather than judgement.

Slightly off topic, but here I am wandering around Phnom Penh and the Tuk Tuks are using Grab or PassApp, which is a local app.  I installed it & it worked better than Grab.   At least there must be some network effect in this sector,  but it looks like local players can pick off the likes of Grab & Uber in specific cities.   I think we need to be very selective with internet businesses.

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