Purplebricks (LSE: PURP) has certainly been a big success for shareholders, with its share price more than quadrupling since its December 2015 float, to 419p. But how much of that represents solid long-term potential and how much is hype?
The former is tricky to evaluate at this stage, but there’s no denying that there’s been plenty of hype — especially as the company’s aggressive TV advertising campaign has propelled it from an unknown to a household name in such a short spell.
Those ads go to lengths to stress that Purplebricks isn’t just some internet thing, but it’s a real group of estate agents. Yet isn’t that doing the opposite of differentiating itself? There’s the no-commission angle too, which is excellent marketing. Yet you still have to pay them, just using a different charging strategy.
Anything special?
What I’m really seeing is not a revolutionary new idea, but a new entrant in a long-established and competitive industry. And it isn’t yet profitable.
Purplebricks isn’t expected to report its first pre-tax profit until the year ending April 2019, and then it’s predicted to be just a tiny one. Fundamentals in the year a company turns profitable aren’t very useful, but by 2020 we should be seeing a more sustainable profit level — and that puts the shares on a forward P/E multiple of 34.
That might actually turn out to be good value, but right now we have no way of even guessing, and a lot can change in the next two years.
My current thoughts are that Purplebricks shares are at best fully-valued today, and they could be seriously overvalued.
Higher flyer?
If you want to put your money into a growth prospect, I reckon Ideagen (LSE: IDEA) is well worth a close look. It’s another company whose shares have more than quadrupled in value, over five years in this case, to 105p.Â
But this time we’re looking at a track record of strongly rising earnings per share, forecasts for two more years of double-digit growth, and significantly lower P/E ratios — 25 for the current year, dropping to 23 a year later. That’s still above the FTSE 100‘s long-term value of around 14, but I think it’s a fair valuation considering the firm’s growth prospects.
Ideagen describes itself as “a leading supplier of information management software to highly regulated industries.” That’s rather a niche part of the software business and immediately makes me think of a captive clientele and high barriers to entry. And the firm has an impressive list of more than 3,000 customers — including Royal Dutch Shell, BAE Systems, and even the European Central Bank.
Great first half
On Tuesday, Ideagen reported a 43% rise in revenue for the first half of the year, to £17.2m, with recurring revenues accounting for 63% of total revenue — which suggests high visibility of future earnings.
Adjusted EBITDA came in 52% ahead at £4.7m, with adjusted EPS up 38% to 1.73p. If anything, that suggests to me that current forecasts might even be a little on the conservative side.
The interim dividend was lifted by 15% to 0.078p, though with a forecast yield of only 0.2% that doesn’t mean a lot just yet. But I see potential for this £200m company to turn into a mature cash cow when it reaches the stage of needing to invest less in future growth.