Shares in hybrid estate agent Purplebricks (LSE: PURP) fell another 5% in early trading this morning, adding to the not-insignificant fall of Thursday afternoon following the release of an extremely negative research note from investment bank Jefferies International. Should those holding the stock be concerned?
Adverse reaction
According to analyst Anthony Codling, Purplebricks’ sales conversion figure was just under 52% over a 10-month period from November 2016 — a rate similar to that of the overall market. The note also suggested that the odds of customers being able to sell their homes through the AIM-listed business were akin to flipping a coin, with the added problem that the former are required to pay fees regardless of whether a sale is achieved or not.
Perhaps most worryingly for holders, yesterday’s research note gave a price target of just 94p for the stock — almost 80% lower than where it stands today.
In response, Purplebricks stated today that the completion rate suggested by Codling was “based on a single month’s data” and “did not include properties that have completed but have yet to be uploaded to the Land Registry“. The Solihull-based business went on to remark that the research did not include “properties which have exchanged, have reached sold subject to contract (SSTC) or are on marketing breaks“.
In sharp contrast to the number suggested by Jefferies, Purplebricks argued that its sales conversion rate was 78%. Furthermore, it rejected criticism of its revenue recognition policy, adding that it “stands behind both the fully audited results and the accounting policy itself“. In an effort to take the bull by the horns, Purplebricks also used today’s statement as an opportunity to provide an update on trading.
In January, the company received 6,106 instructions — a rise of 66% on the previous year. Sales on 4,618 properties were also agreed, bringing the total value of all UK property sold and completed on by the company to over £10bn.
Despite these numbers and assurances that the company was performing in line with management expectations, it would seem that some investors are rattled. Having doubled in price over the last year, I’m not sure I blame some for taking profits. The question is, are further falls to come?
Rich valuation
As a company, Purplebricks has long divided opinion. While few would deny that it has reinvigorated the industry, many continue to have concerns over the company’s £1.3bn valuation given that it’s still to move into profit. As a Foolish colleague recently commented, it would appear that a lot of Purplebricks’ attractions are already firmly priced-in.
Its ambitious growth strategy, which has led the company to expand into Australia and the highly-lucrative US market, also continues to generate debate. On this front, Purplebricks reflected that its performance in the former “remains on track” and that “work continues at pace” in preparation for its New York launch. Whether this is enough to silence those who believe the company is biting off more than it can chew remains to be seen.
There’s also the distinct possibility that some will regard today’s reaction as overly defensive, particularly if it really is the game-changing company it purports to be.
With so much uncertainty over whose figures are more accurate, I’d be tempted to look for other, less risky, holdings for a growth-focused portfolio at the current time.
