The UK housing market is booming, but I’d avoid this growth stock

A booming housing market has been good news for listed housebuilders, mortgage advisers and estate agents. And this is borne out by the latest full-year numbers from Purplebricks (LSE: PURP). But should investors like me be ready to take a stake in this growth stock? I’m not so sure… 

Rocketing earnings

Now, don’t get me wrong. The figures from the online estate agent were pretty encouraging.  Unsurprisingly, the number of instructions received by Purplebricks jumped higher, by 14%, to a little over 58,000 in the year to 30 April.

The average revenue per instruction received also increased by 7%. All told, this led the online estate agent to report a 13% rise in revenue to £90.9m. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) also rocketed 314% to £12m. 

On top of these numbers, Purplebricks said it would be launching a new pricing model this month, following a successful trial in the North West. Customers will be given the option of having their upfront fee reimbursed if they don’t sell their home.

However, since it’s too early to say how well this will be received, Purplebricks said it expected FY22 EBITDA would be flat year-on-year. This would be in accordance with what the market’s expecting. 

Unfortunately, the market doesn’t seem all that impressed with today’s news. Purplebricks’s shares were modestly lower in early trading.

Why might this be?

There could be a few reasons. For one, some investors may still be finding it hard to forgive the company for over-reaching itself in the early days by trying to capture overseas markets.

Yes, the share price is up almost 70% in the last 12 months as Covid-19 has been (almost) defeated. However, many small-cap growth stocks have experienced similar gains. Moreover, Purplebricks’ valuation is still 83% lower than where it was nearly four years ago. As a one-time holder, I’m just glad I departed with a profit back then. 

It’s also hard to say where the Purplebricks share price goes from here. Sure, there are things to be positive about. The UK housing market is hot and the new strategy could work. On top of this, Purplebricks’ finances also look pretty sound.

Following the sale of its Canadian business, it had £74m in cash at the end of the period. Like other firms, PURP has also repaid the furlough support it received (£1m) over the pandemic.

Against this, investors need to bear in mind the stamp duty holiday has now finished. Whether this leads to a fall in sales and a subsequent reversal in the housing market remains to be seen.

Regardless, CEO Vic Darvey’s goal of gaining market share and growing annual revenue by more than 20% in the medium-term won’t be easy. The environment in which Purplebricks operates remains highly competitive. Yes, effective marketing will help, but that comes at a cost.

Speaking of which, there’s also the opportunity cost for investors like me to consider. Why bet on a company that’s still to generate meaningful profits in an incredibly buoyant market when I can probably generate more-than-adequate returns for much less risk elsewhere?

Better options

Despite once being optimistic about its ability to truly disrupt a stale industry, I’m far warier of Purplebricks than I used to be. In my view, there are far more promising growth stocks to invest in.