In a quieter week on the local market after a flurry of activity in the first quarter earnings season, Purple Group came out with an important trading statement. It expects headline earnings to be up by between 194% and 213% for the six months to February 2025. You might be familiar with the concept of a J-curve or hockey stick growth pattern, something that gets used — and abused — in many investment committee packs and pitch documents. At Purple, they are showing you what that shape looks like.
In fact, things are now at the point where I’m considering a long position for the first time in this company’s journey. We seem to have reached the point where the excitement around the business during the pandemic is starting to play out in the earnings profile. Of course, many of those pandemic-period punters have long since sold their shares at a loss, as is typical of hype trades. This is why I avoid them, and it’s why you should too, unless you are specifically after a momentum trading strategy — essentially a game of musical chairs.
Coming into 2020, Purple Group was trading at about 40c. It eventually topped out at around 350c in early 2022. This was an incredible run in the share price that was completely divorced from reality. It was driven by a new generation of investors who had downloaded the EasyEquities app and got stuck into the markets, enjoying the macroeconomic wave of immense monetary stimulus. It was easy to look like a hero: all you really needed to do was throw darts at the US market. Of course, this did wonders for the virality of the app, with new investors tasting success and encouraging their friends to give it a try.
The groundwork for this rapid growth had been laid for several years before the pandemic. It’s the old joke about how it takes years to become an overnight success. Purple Group was in the right place at the right time, and many start-ups have a similar story. People are quick to attribute this to luck, but you have to put yourself in a position where you can get lucky.
It’s the old joke about how it takes years to become an overnight success
To add fuel to the share price fire, all the new app users were also able to invest in the company behind their new favourite hobby: investing through EasyEquities. The Purple Group share register was filled with retail investors who were drunk on success and a mistaken belief that investing is straightforward. The price was barely ever a feature of the conversation among new investors. Who cares about valuations when everything is going up?
One of the best ways to see the impact of the pandemic on the local equity market is to chart Purple Group against Renergen. The correlation in the share prices was incredible, as the same base of retail investors was piling into both companies. That correlation has broken down severely in the post-pandemic period, as Purple Group has demonstrated that it has a sustainable business, while Renergen is still fighting for any sort of credibility in the market.
Even so, Purple Group is only trading at just over 100c, still miles off the pandemic highs. But looking at the current price and pointing out how far it still is off the pandemic highs isn’t a helpful analysis, as it uses a flawed base. Instead, consider that annualising the midpoint of the interim earnings guidance suggests a forward earnings multiple in the low 20s. Growth stocks on the JSE — well, the few that exist — are happily trading at those sorts of levels. The Purple share price is no longer being driven by hype but rather by underlying earnings.
My view on Purple Group has always been that the valuation was the problem, not the business. The EasyEquities app is a disrupter in the purest form, unlocking a customer base that otherwise wouldn’t exist. Much of the criticism aimed at the app during the pandemic was driven by professional jealousy or a lack of understanding of the customer base and how severely they had been shut out of the markets before this app came along.
By the time you read this, detailed earnings would have been released. I will be looking out for the sources of the headline earnings growth. If it all checks out, it might be time to add a long Purple position to my portfolio.
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