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…
Purplebricks versus Boohoo - Sure people can copy Boohoo but consumers also have a long-term relationship with the Boohoo brand. If I trust that Boohoo's brand works for me than why change? There are also some lock-ins such as body measurements etc. Boohoo is also likely to develop economies of scale in terms of distribution and has significant expertise in the area in which it operates. So I am not sure the comparison holds. I could see a competitor taking out Purplebricks as it is a commodity type product but I don't think I could see the same with Boohoo.
Purplebricks versus Countrywide - Your comparison may make sense but are either of them good to invest in? What if Amazon moved into property selling services.
