Shares in online estate agent Purplebricks (LSE: PURP) crashed this morning following a downbeat half-year trading update. Is this penny stock one to avoid at all costs? Or should long-term Foolish investors like me be getting ready to pounce? Here’s my take.
“More challenging” market
Buoyed by the stamp duty holiday introduced by the government, we’ve seen a post-pandemic boom in the UK property market. Today however, Purplebricks gave indications that the bubble — if we regard it as such — could be close to bursting.
New instructions have “slowed significantly“, making the six-month trading period to the end of October “more challenging” for the AIM-listed company. In fact, PURP estimated that the number of properties brought to market was roughly 23% below the same period in 2020.
To complicate matters, the firm has also been making adjustments to its business model over this time. A new pricing system has been introduced and staff have been brought in-house. While CEO Vic Darvey said he had been “encouraged” by results from this new strategy, it’s clear this isn’t apparent in performance just yet.
What now?
Confirmation of half-year numbers is expected on 14 December. Where the Purplebricks share price goes between now and then is anyone’s guess. Personally, I wouldn’t be surprised if the selling pressure continued, especially as the company expects the trading environment to remain tough.
Of course, there’s not much Purplebricks can do about the supply/demand imbalance. And even if the market is only pausing for breath as the colder winter months approach, bills will still need to be paid. As a result, the company now expects Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) for the full financial year will come in “below previous guidance“. That’s hardly encouraging stuff.
Penny stock perils
Today’s 35% fall in the Purplebricks share price leaves the stock trading at just 34p a pop. Had I invested when the company’s valuation peaked back in July 2017, I would have lost 93% of my capital, on paper.
If this isn’t a lesson on the need to stay diversified within a portfolio, I’m not sure what is. Sure, penny stocks have the potential to deliver life-changing returns over a short period of time. Purplebricks is proof that the reverse is also true and, I submit, far more likely.
You might speculate that investor sentiment couldn’t get much worse and now might be the time to buy. I can see the logic in that. However, is a company that seems unable to grow investors’ wealth even when times are good, one I want to own when the (housing) market slumps?
Even if things do rebound, it’s clear PURP is needing to spend a lot of money to keep up to speed. Cash fell from £75.8m at the end of October 2020 to £58m last week. Ongoing investment for any business is inevitable. That said, I’m sceptical as to whether any of this will help Purplebricks truly distinguish itself in what remains an incredibly competitive market with increasingly digitally-savvy rivals.
One to avoid
I’d say Purplebricks’ purple patch is long in the past and unlikely to return any time soon. Having once owned the stock, it now goes firmly into my ‘avoid’ pile. As economist John Maynard Keynes once reportedly said: “When the facts change, I change my mind.”
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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