I’ll come to Purplebricks shortly, but first I’m going to discuss eve Sleep, which today released its maiden annual results as a listed company. This designer and seller of own-branded mattresses and other sleep products, including duvets, pillows and sheets, bills itself as a disruptive business, because it’s “e-commerce focused.” Its aim is: “to become the leading pan-European sleep brand.”

Not exactly unique

eve was founded as recently as 2014 and listed on AIM at 101p a share in May last year. Woodford already owned 17.5% of the company before its IPO but has since built his stake to over 28%.

The company today reported a whopping 132% increase in sales to £27.7m, a tad ahead of City expectations of £27.4m, but a bottom-line loss of £19m. The shares rose 2% in early trading to 130p, valuing the business at £180m.

The hefty rating of 6.5 times sales shows a good deal of future growth is already in the price. However, while management reported increased sales up 94% for the first six weeks of the new year, the City forecast for 2018 ahead of today’s results was for continued growth of around 130%. Six weeks isn’t long, of course, but if growth is decelerating significantly, the market may well decide a less bullish price-to-sales ratio is merited.

eve’s e-commerce focus isn’t exactly unique and I see plenty of competition in the subjective and maybe faddish comfy mattress space. For this reason, I reckon there’s a high risk eve will fall short of sales growth rate expectations and management’s target of group profitability by the end of 2019. Due to the elevated price-to-sales rating and a sky-high ratio of over 200 times forecast 2019 earnings, I rate the stock a ‘sell’.

Bricks could tumble

Thanks to the success of its extensive advertising campaigns, hybrid estate agency Purplebricks needs no introduction. Woodford also owns just over 28% of this company. However, because it’s one of the bigger companies on AIM — a market cap of over £1bn at a share price of 390p — the £300m value of his holding is considerably larger than his £51m stake in eve. Indeed, Purplebricks is a top six holding in all three of his funds.

City analysts expect the company to report revenue of near to £100m for its financial year ending 30 April but the same £19m bottom-line loss as eve, followed by a maiden profit in fiscal 2019. Its price-to-sales ratio of over 10 is even higher than the mattress specialist’s, while it also trades on over 200 times forecast 2019 earnings.

I’ve long been concerned that Purplebricks’ instruction-to-sale-completion rate may be relatively low. Although the company has disputed such claims, it continues to decline to publish the number in question. I remain sceptical about both the long-term sustainability of its no-sale-still-pay business model and the attractiveness of this model in what looks like a near-term slowing UK housing market. For these reasons, this is another highly rated stock on my ‘sell’ list.

With this in mind, I’ve been having a look at recent regulatory news announcements to see what shares he’s currently buying and selling.

Sticking with a falling stock

Woodford first bought FTSE 100 security giant G4S (LSE: GFS) at around 275p back in 2012 when he was at Invesco Perpetual. The timing was unfortunate, being just before the company’s London Olympics debacle.

Nevertheless, he bought the stock afresh (in the region of 250p) when he launched his Woodford Equity Income fund in 2014, describing it as a “core” holding. It declined through 2015 (ending the year at 225p) but he continued buying, taking his stake above 5%.

Recovery and sales

The shares began recovering from mid-2016, and at 235p Woodford and his team said: “Although it has had several problems in the UK in recent years, G4S is a global-facing business with strong long-term growth prospects in emerging markets in particular. The company has a robust and geographically diversified pipeline, strong cash flows and good demand for its services globally. In our view, the market continues to undervalue these growth prospects.”

The shares continued to recover and Woodford trimmed his position in May this year in the region of 320p. On Monday this week, with the shares down to around 275p and the scandal-prone company embroiled in yet another unedifying controversy, it notified the market that Woodford had cut his holding from 5.8% to below the disclosable threshold of 5%.

We’ll have to wait for his fund update in October to see whether the latest sale is another trimming of his stake or whether he’s exiting the position and, if so, why. Trading on a forward P/E of 14.9, with a prospective dividend yield of 3.5%, the current valuation doesn’t look exactly cheap to me, particularly for a company with an unfortunate propensity to shooting itself in the foot.

Sleep on it

On the buying front, Woodford has added to a number of holdings in recent weeks. His stakes in pharma firm Circassia and online mattress and bedding seller eve Sleep (LSE: EVE) have both passed notifiable thresholds.

Woodford already owned 17.5% of eve Sleep before its flotation on AIM in May. He participated in the IPO at 101p a share, taking his stake to 18.6%, and increased it to 22.2% by the time the company released its half-year results last week. He bought more shares on the day of the results, lifting his holding to 24.04%, and upped it again on Wednesday to 25.09%.

The shares are currently trading at around 90p, valuing the company — which is forecast to be lossmaking for the foreseeable future — at £125m. While it has net cash of £37m and Woodford and his team reckon it can create “substantial shareholder value as it matures,” I’d want to see a bit more evidence that this is a viable business with a significant competitive advantage.

Will today’s interim results be the catalyst for a change in investor sentiment? Let’s check the numbers.

Soaring revenue

In the six months to the end of June, revenue jumped by 126% to £11.5m. International sales were particularly strong — rising 153% compared to the UK’s still-really-rather-good 107%. What’s more, this positive trading momentum appears to have continued beyond the end of the reporting period. Over July and August, the company achieved underlying revenue growth of 129% year-on-year.

Of course, this kind of rise in sales isn’t completely unexpected when it’s revealed that eve expanded into nine new territories over the reporting period, bringing the number of countries in which it has a presence to 15. According to the company, this rate of growth is “significantly ahead of schedule“. It also needs to be remembered that sales increases of this kind aren’t all that rare in young businesses starting from relatively low numbers compared to much larger peers.

Nevertheless, credit where it’s due. The company declared that unprompted awareness of its brand had increased to 4.1% by the end of June and to 5.4% by September. This makes eve Sleep the eighth most recalled mattress brand in the UK, higher than home furnishings giant Ikea. Recently-announced partnerships with Next Home and German retailer Karstadt should only serve to further increase consumer recognition over time, given that eve’s products will now be available to buy “in 146 stores in Europe’s two largest mattress markets“.

Confession time?

So, have I got it wrong when it comes to eve Sleep? Clearly, the huge rise in revenue can never be a bad thing, even if the aforementioned international expansion and ongoing investment in growing brand awareness led the company to record a pre-tax loss of £9.1m (compared to £3.2m in H1 2016). Having Neil Woodford as a major shareholder is another positive, even if — as far as his investments are concerned — the star fund manager has had a summer he’d like to forget.

Nevertheless, I remain rather sceptical on Eve’s prospects and the idea that any company with a low cost, disruptive, online-focused business model will automatically succeed. Despite the recent dip in value, a market cap of £112m continues to feel rather rich considering it sells the kind of products that people tend not to replace on a regular basis. The not-insignificant cost of mattresses also suggests that it might be included in a list of companies that consumers are most likely to shun at the first sign of an economic downturn (which, given our forthcoming departure from the EU, rising inflation and slowing wage growth, could be on the horizon). In such a scenario, I struggle to see how non-mattress sales at eve — which currently only make up 10% of the company’s total revenue — will be enough to cushion the blows. 

Today, CEO Jas Bagniewski stated that eve has “much to prove” in the £26bn European market in which it operates. Although recent progress is encouraging, I’d say that it still has much to prove as an investment.  

For investors on the lookout for the next Purplebricks or ASOS to see their retirement portfolio take off like a rocket, there is plenty to like about eve Sleep. In the half year to June, revenue increased a whopping 126% year-on-year (y/y), albeit from a very low base, to £11.5m. This certainly suggests the company’s in-house-designed mattresses, pillows and sheets are proving a hit with consumers.

It’s also good to see the management team, which includes several of the co-founders, isn’t relying solely on the direct-to-consumer online sales that are its core offering. The team has now struck deals with retailers such as Next and Debenhams to sell the products in-store. This serves the dual purpose of increasing overall sales as well as significantly increasing brand awareness.

However, there are some downsides that potential investors should be aware of. As the company ramps up expansion it is also ramping up spending and operating losses for 2016 increased to £11.3m, or nearly as much as the £11.9m posted in revenue. That said, listing the company did raise £35m before fees, so it can withstand several years of losses before needing to raise further funds.

Furthermore, with 77% of shares not in public hands, it’s unclear whether minority shareholders can be assured their needs will be prioritised. While eve Sleep is growing sales at a rapid clip and has a huge addressable market, buying shares of a lossmaking AIM-listed start-up does not appeal to me.

A flashier option

One London-listed online retailer that’s actually proven profitable is Australian flash sale group MySale (LSE: MYSL). The company runs flash sales across Australia, New Zealand, the UK and Southeast Asia and brought in A$3m in EBITDA in the half to December from A$136m in total revenue.

Equally reassuring for investors is that the business finally appears to be cash generative, with cash balances rising from A$27.5m to A$29.1m half-on-half. The fact that previous investments in building out marketing and supply chain capabilities are paying off bodes well for the firm’s profitability as it continues to grow revenue at a rapid pace, with online sales up 18% y/y in H1.

The downside is that even with a maiden pre-tax profit pencilled-in by analysts for the year to June, the company is still valued very, very highly at 176 times forward earnings. Potential investors should also be aware of the problems flash sale sites ran into in the US and Europe a few years ago when retailers no longer had to dump top-notch inventory at bargain prices to flash sellers as they did during and immediately following the Great Recession.

Although MySale turning its first profit is to be applauded, its shares remain far too highly valued for me to invest in a business model that that is unproven over the long term.

Despite this, investors should still proceed with caution. For every Boohoo.com and ASOS there will be many that struggle for a variety of reasons. Here are just two that I believe are examples of the latter.

Dragged down by Europe

Earlier this week, shares in £591m cap electrical retailer AO World (LSE: AO) tumbled following the release of its latest full-year figures to the market.

To recap, while UK operating profit rose 25.9% to £15.6m, operating losses in Europe climbed to £27.6m (from £23m in 2016) as the company attempted to gain traction in the continent through significant investment in the Netherlands and Germany. Overall, the company reported a group operating loss of £12m — a 13% increase on the £10.6m recorded in 2016.

To make matters worse, the Bolton-based company also stated that the UK trading environment remained “challenging” and that its Q1 growth rate was expected to “slow significantly year on year“. 

A quick glance at AO World’s financials makes for fairly depressing reading. Free cashflow looks awful, operating margins woeful and — as might be expected from a company with a high growth strategy — there’s no dividend to speak of. 

To make matters worse, as inflation begins to bite, wage growth declines and Brexit approaches, it’s not unreasonable to suggest that cost-conscious consumers will delay purchasing the sort of goods AO World supplies. Even distressed purchases (such as a replacement washing machine) won’t be enough to save the company from further pain – particularly as I see no reason for customers to automatically turn to AO World over any other retailer. It’s a firm SELL for me.

The stuff of nightmares?

Recently listed mattress, pillow and duvet retailer eve Sleep (LSE: EVE) is another company that won’t be finding its way onto my wishlist.

Since coming to the market in May, shares in the small-cap have dipped 6%. Although it’s still early days, this reaction does suggest that investors are concerned by the lofty £140m valuation slapped on the lossmaking business when it listed.

To be clear, I’m not averse to investing in lossmaking companies so long as their future prospects look sufficiently bright. Think robotic automation software provider, Blue Prism and online estate agent Purplebricks. 

No, my concerns with eve Sleep can be summarised in a few questions. Why shop for bed products at eve when there is far more choice available at competitors? And even if you are impressed by the company’s products, how often are you likely to return as a customer? I doubt many people replace their mattresses on a regular basis. Lastly, what is eve doing to truly disrupt the industry? It’s this combination of a lack of product differentiation and a need to consistently find new customers (rather than rely on repeat business) that make me bearish on the stock.

Not all online operators are created equal, particularly if the product(s) being sold can be replicated with ease or purchased at a lower cost elsewhere. As such, I think investors should steer clear of AO World and eve Sleep for some time to come. 

It contains many disruptive early-stage and early-growth companies. In fact, currently, well over half the holdings aren’t even listed on the stock market. Some of these businesses could, in time, deliver truly spectacular returns.

Last Thursday, one of Woodford’s unquoted stocks was floated on the AIM market. Could early-birds be on to a winner by snapping up shares at this relatively early stage of the company’s growth?

Business model

eve Sleep (LSE: EVE) describes itself as “an e-commerce focused, direct to consumer European sleep brand which designs and sells eve-branded mattresses and other sleep products, including pillows, sheets and duvets”.

Woodford and his team believe its low-cost, digital business model gives it “a substantial competitive advantage” and that the company can create “substantial shareholder value as it matures”.

Limited financial information

Woodford owned 17.5% of the business prior to its admission to AIM but participated in a £35m placing at 101p a share, taking his stake to 18.6%. The market cap of the company on admission was £140m.

I can’t find any broker forecasts for eve and with it having been launched as recently as February 2015, financial information is limited. Revenue for 2016 was £12m, with the UK contributing about £8m, Europe £3m and the rest of the world £1m. The group posted a loss for the year of over £11m.

However, Woodford holds eve’s management team in high regard “for their years of expertise in creating and nurturing early-stage companies in the digital realm”. And with the company reckoning there’s a £26bn market in the UK and Europe to attack, there’s considerable potential for growth.

Hot sector

As far as sentiment goes, investors have certainly recognised the structural shift in retail to online and shown a strong appetite for online specialists that have come to market in recent years. Take a look at Boohoo.Com, On The Beach and Gear4music, for example.

In what is a hot segment of the market, has eve taken advantage to IPO at a price that overvalues the business? It’s priced at 11.7 times trailing sales, which is considerably higher than Boohoo (7.2), On The Beach (6.8) and Gear4music (2.8), albeit eve is coming from a lower revenue base.

Another thing to perhaps note is that eve isn’t the first company to list on the stock market that Woodford backed as a private business. And they’ve had mixed fortunes. For example, Allied Minds‘ shares shot up from 190p to over 700p in less than a year, before collapsing to 140p and Circassia Pharmaceuticals, which listed at 310p, is currently trading at 97p. On the other hand, Purplebricks is looking strong, having risen to 350p from a listing price of 100p.

On balance, I don’t think I’ll be snapping up shares in eve at this stage. However, it’s going on my watch list and I’ll be looking out for broker notes and forecasts.