A UK tech share has lost three quarters of its value over the past year. Its name is familiar from it signs on streets across the country – should it now also make its way into my portfolio?
Online estate agent
The share in question is digital estate agency Purplebricks (LSE: PURP). Over the past year, the Purplebricks share price has tumbled by 75%.
The business has faced significant challenges. Its old model of fixed fees led some customers to doubt the motivation of Purplebricks’ sales agents. More trouble came with compliance problems in the company’s letting division. An interim £6.8m profit last year had slipped to a £20.2m loss at the same point in the company’s latest financial year.
Positive signs
Could the fall present a buying opportunity for my portfolio?
I see positive signs in the business. It has changed its field sales agent structure and also moved to improve processes in its letting division. Both actions should help it move on from a difficult year.
Even with the price fall, already the price of this UK tech share has doubled from its 12-month lows.
Is the Purplebricks share price a bargain?
If the business improves, the current share price could still turn out to be a bargain.
Directors have been scooping up the shares. Last month, for example, the company’s chairman bought shares on the open market on three separate occasions. He was not the only director buying.
Although I think the Purplebricks share price could yet turn out to be an attractive one today, I also see challenges that might crop up. The business model has never produced the sorts of results I would hope for from an online estate agency. Although Purplebricks recorded a post-tax profit of £3.9m last year, that came on top of many years of losses – some of them substantial.
2019, for example, saw a post-tax loss of £54.9m. That is over two thirds of the current market capitalisation of £75.4m. So even if the business has indeed sorted out its most recent problems, I still have doubts about how attractive its underlying business model is.
On top of that, the recent problems have tarnished Purplebricks’ image in its marketplace. The number of instructions it received in the first half fell by 38%. The business model relies on critical mass – if buyers or renters can find far more properties by looking at a single competitor’s site, the motivation to use Purplebricks’ service falls. That in turn could lead to a vicious circle as buyers and landlords choose to list their properties elsewhere. Such a turn of events would further hurt revenues and profits for Purplebricks.
My next move on this UK tech share
Although I understand why it can look like a bargain, I am not so sure. Its business was not consistently profitable even before it ran into its most recent problems. Although it is working to move on from them, they may have hurt the business in the long term.
I reckon there may be big rewards if I add Purplebricks to my portfolio at the moment. But I feel there are large risks too. Turnaround situations with all their unpredictable moving parts do not match my style of investing. For those reasons, I will not be buying this UK tech share for my portfolio.