Shares of hybrid estate agent Purplebricks (LSE: PURP) hit an all-time high of 525p in the summer of last year. However, we’ve seen a major decline since. A further 12% drop last Thursday, following the release of the company’s half-year results, took the price down to near 130p. And while there’s been a mini-recovery in subsequent trading sessions, the shares remain around a level not seen since 2016.
I confess I’ve been bearish on Purplebricks for a long time, in company with most of my Motley Fool colleagues. However, it’s said that every stock has its price. With this in mind, do I think Purplebricks is now too cheap to miss?
Big issue
My colleague Kevin Godbold wrote an article reviewing last week’s results, but I’m going to focus today on one big issue that previously informed my bearish view. I was concerned that revenue growth in the UK was slowing dramatically, despite the company significantly increasing its marketing spend. Do the latest results allay my concern?
In the table below, I’ve broken out UK revenue and marketing spend into half-years (H1 and H2). The increase and growth rate figures are on the basis of H1-H1 and H2-H2.
| H1 2015/16 | H2 2015/16 | H1 2016/17 | H2 2016/17 | H1 2017/18 | H2 2017/18 | H1 2018/19 | |
| *Revenue (£m) | 7.2 | 11.4 | 18.3 | 24.9 | 39.9 | 38.2 | 48.6 |
| Revenue increase (£m) | 6.4 | 8.8 | 11.1 | 13.5 | 21.6 | 13.3 | 8.7 |
| Revenue growth rate | 800% | 338% | 154% | 118% | 118% | 53% | 22% |
| Marketing spend (£m) | 6.6 | 6.3 | 6.6 | 7.8 | 10.1 | 11.3 | 13.5 |
| Marketing spend increase (£m) | 5.5 | 3.9 | 0.0 | 1.5 | 3.5 | 3.5 | 3.4 |
| Marketing spend growth rate | 500% | 163% | 0% | 24% | 53% | 45% | 34% |
* Under International Accounting Standards (IAS) 18.
As you can see, Purplebricks ramped up marketing spend to over £6m in 2015/16 (the year it listed on the stock market). This produced an impressive initial revenue growth rate of 800% from a low base. And while this rate soon began to fall rapidly, revenue continued to rise in £m terms. A further significant ramp-up in marketing (by £3.5m) to over £10m in H1 2017/18 temporarily halted the deceleration of the revenue growth rate at 118%. And saw the £m revenue increase hit a high of £21.6m.
However, since then, further c.£3.5m marketing increases in each period have produced lower incremental £m revenue gains — namely, £13.3m and £8.7m. The revenue growth rate has more than halved in each period. Ominously, in the latest period, it’s below the growth rate of marketing spend for the first time (22% versus 34%). It seems Purplebricks has to continually ramp-up marketing, but is getting a diminishing revenue return from it.
Tipping point
Looking ahead to H2 2018/19, if the revenue growth rate were to continue its trend of more than halving, and marketing were to continue its trend of rising at c.£3.5m per period, we’d reach a tipping point. The increase in revenue generated would be no more than the increase in marketing spend.
Purplebricks’ latest numbers look to me to provide a further indication of a trend towards this negative outcome. As such, the results only increase my doubts about the long-term viability of the business model. And with management in the process of spending tens of millions on aggressive international expansion, I continue to see it as a stock to avoid.