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Are The Purplebricks Problems Terminal Or Merely A Flesh Wound? 

Tim Worstall
Tim Worstall trader
Updated 4 Jan 2022
  • The base idea at Purplebricks, to revolutionise estate agency, has merit
  • The execution at Purplebricks has tended to lack sophistication, even sense at times
  • The question becomes whether the Purlebricks story is suffering from a mere flesh wound or a terminal injury.

The basic idea at Purplebricks Group PLC (LON: PURP), that British estate agency was ripe for disruption isn’t and wasn’t a bad one. Any industry does get set in its ways and as with Foxton’s in a very different manner, it is possible to new entrants to irrupt and destabilise.

The problem with Purplebricks has always seemed to be the execution of the idea rather than that idea itself. Fixed price and sale or no sale fees seem like a useful innovation to at least try. Volume of trade certainly arrived as a result of trying it.

However, it’s worth having a little look at the history here. The initial boost came from the Woodford funds who owned a substantial portion of the company. Actually, one of the great investments by those funds but that in itself became a problem.

Back in 2019, there were worries over how Purplebricks was recognising revenue. Given that it’s a fixed price, sale or no sale, fee then exactly when that should be revenue for the company should be easy enough to determine. But it wasn’t being done, arguably, right. So, the share price dropped. Then came the Woodford problem. His funds faced a wave of redemptions but much of the investment position was in unlisted and illiquid stock. So, the liquid portion had to be, umm, liquidated to meet the redemptions. Purplebricks was hit by this, some 12% of the share issue being sold by those funds and then more again. 

After this it could be hoped that the Purplebricks share price would recover. Yet it didn’t. Then there was the American adventure that had to be retreated from. Much more recently we found out that their paperwork was wrong. This is the Purplebricks rental deposit problem we described. Given the cash position, it doesn’t look like that, in itself, is going to be terminal. But it is possible to start worrying about whether anything is going to go right.

At which point it’s worth thinking about not just specific events but the idea and business as a whole. There are significant changes going on. The new management team is entirely changing the labour structure of the company – from commissioned salesfolk to salaried. This could be a good idea, might not be. But it’s certainly a large change, the biggest problem being the extant salesforce. For those attracted to commission based jobs are not likely to be those equally attracted to salary. Purplebricks may well see an exodus of their most experienced staff as a result.

But perhaps the largest feature here. Given the stamp duty holiday and more general economic circumstances, the British housing market has been on a tear. Not prices which aren’t relevant to a broker, but turnover. The number of houses being bought and sold. Yet in a booming market like this Purplebricks hasn’t been making a profit, not even close. We’ve the slowdown in the market given the reimposition of stamp duty to come as well. 

As we’ve said before Purplebricks is a speculation now. Nothing wrong with that but it is necessary to know it. It might be that it’s just unlucky and has been suffering that series of flesh wounds. Or that the problem is terminal.

Should you invest in Purplebricks shares?

Purplebricks shares are traded on the London stock exchange's AIM market (the alternative investment market), which is the submarket specifically for smaller companies. AIM stocks are attractive to investors as they have tax advantages and smaller companies have the potential to benefit from rapid growth. But are Purplebricks shares the best buy? Our stock market analysts regularly review the market and share their picks for high growth companies

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.