Purple Group is having a decent 2025 so far, up 9% year to date thanks to a nod from the market in response to recent interim results.
The share price does tend to become range-bound, though, with choppy trade for the past month or so as it establishes a new base. But that’s not a bad thing for investors, as it helps reduce downside risk once it is clear that an upward move in the price is likely to stick.
It also means there is plenty of time to make a decision after the numbers come out, as Purple simply refuses to go up in anything remotely resembling a straight line. It’s all about step-changes in the chart, which tells you the market is prepared to wait for actual numbers rather than making brave assumptions.
But just how brave do those assumptions need to be these days? There are strong arguments to be made that a significant amount of risk has come off this story, particularly as there has been so much progress in shifting the business model from reliance on brokerage to having annuitised revenue streams. This is an important evolution that does great things, not just for the ability of management to have reasonable financial forecasts and plans for the future, but also for the valuation.
High multiples are for businesses with reliable earnings, otherwise it just becomes a lottery for investors. This is why cyclical stocks trade at much lower multiples than high-quality stocks with wide moats and resilient numbers.
This isn’t to say that Purple Group is cheap. On a p:e of 36.5 based on the price of 122c per share at the time of writing, the market is putting plenty of importance on growth. The good news is that Purple is delivering this growth in spades, with interim revenue up 25.8% and operating expenses only 13% higher. This has driven huge margin expansion, taking headline earnings per share up from 0.78c to 2.36c. Even if you just annualise the interim results, the current price is a forward p:e of 25.8.
The trick is that it would be reasonable to assume ongoing growth into the second half of the year, so Purple should do better than simply reporting a flat second half vs interim earnings.
To feel good about making growth assumptions, you need to believe in the growth drivers. The most important one is, of course, active clients, a number that grew 8% in the interim period. Then you have to believe that each client is becoming more valuable over time, so growth is coming from the existing client base as well as from new clients.
There is plenty of time to make a decision after the numbers come out, as Purple simply refuses to go up in anything remotely resembling a straight line
With total client assets up 31% and the active inflow per retail client up 49%, growth is clearly coming from older customers in addition to the newest clients. Purple’s reporting confirms this, with a particularly encouraging sign being the high growth rates among some of the oldest cohorts. This is the beauty of quite correctly encouraging clients to cement the behaviour of putting money into the market regularly.
What about resilience in the face of changing economic circumstances? In the interim report, Purple flagged 13 consecutive record deposit months vs comparable periods. Perhaps even more importantly, it generated nonactivity revenue of R117m in the interim period vs R99m from activity-based revenue. That doesn’t sound like a cyclical business to me.
There is growth and it seems to be coming through consistently, which is great. But what about margins — can they keep expanding? To assess this, you want to see average revenue per user (Arpu) growing more than what it costs to serve a customer. Arpu increased 24% and the cost to serve was up just 5%, so platform economics are playing out nicely here.
This is critical to the growth story, as investors want to see a combination of revenue growth and margin expansion in order to achieve high growth rates in net profit.
Speaking of margins, the earnings before interest, tax, depreciation and amortisation (ebitda) margin climbed from 21.4% to 30% year on year. Finance income is a core part of the business, so there’s plenty that happens below the ebitda line. The net profit margin expanded dramatically from 7.1% to 18.2%. It looks as though ongoing expansion in both these margins is likely from here.
Purple Group has always been an interesting business. It’s now a particularly good one, given the level of diversification and the clear establishment of a moat in this space. But, above all, we are finally at the point where the earnings multiple (particularly on a forward basis) looks reasonable for a growth stock.
Having been extremely patient with Purple (in what turned out to be the right approach), I went long after the recent earnings. The subsequently established base in the chart only strengthens my belief that things should be upward from here.
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