Can Zillow and Trulia Go Much Higher in Share Price?

Applications for new home sales increased by 14% in July to an estimated 43,000 new home sales despite mortgage rates rising in recent months. Also on the rise are real estate marketplace websites that connect buyers with sellers and lenders. This market opportunity is estimated to be $29 billion. Both Zillow (NASDAQ: Z  ) and Trulia (NYSE: TRLA  ) have been placed in the limelight within this industry after their surges in share prices this past year.

The business model
Zillow and Trulia follow very similar business models. In short, they act as real estate marketplaces serving homeowners, home buyers, sellers, renters, real estate professionals, and lenders of all types. Each company has a niche of secondary tools to help them stand out from each other.

Zillow highlights on its website that it is able to present homes not yet on the market. Trulia gives the user the ability to learn about agents, neighborhoods, schools, crime, and commute times. In the end, each company provides tools enabling their users to avoid driving around to homes that don't exist yet or to research schools and crime rates in potential neighborhood choices.

Market valuation
Trulia's IPO occurred in September of 2012 -- over a year after Zillow's July 2011 IPO. Year to date, Zillow and Trulia have seen their stocks soar 240% and 150%, respectively, as good news for one often becomes good news for the other.

 

Zillow

Trulia

Market Cap

$2.86 billion

$1.40 billion

Share Price Rise Since IPO

177%+

70%+

52-Week Share Price Range

$23.00-$97.29

$14.69-$48.40

Overpriced?
Analysts and investors are now debating whether their run-ups are justified. Second-quarter earnings showed a net income loss of $10.2 million for Zillow, while Trulia saw a loss of $2.4 million. However, much of the losses for each company were caused by heavy investing in sales and marketing while expanding services with improvements.

Others criticize the intellectual property of each business, or lack thereof, which can open the door to bigger competitors in the future, like a Google or even an Amazon.com. While it wouldn't be wise to count either of these big players out of the online real estate marketplace business, it isn't something that would occur overnight, and users aren't automatically going to switch services.

Is Move moving in or out?
Move (NASDAQ: MOVE  ) is often placed third behind Zillow and Trulia when it comes to the future of the online real estate marketplace. Its market cap is less about $580 million even though it went public over a decade ago, and today it manages nearly a dozen real estate portals. Additionally, it is not keeping pace with either Zillow or Trulia in terms of quarterly revenue growth on a year-over-year basis, or unique monthly users. If the trends continue, these metrics could foreshadow where Zillow and Trulia may be heading in terms of company valuation and -- consequently -- share price.

Revenue and user growth are king
Earlier in August, Zillow's CEO stated that investors shouldn't trade their stock based on EPS but should concentrate on revenue growth. Revenue growth opens up opportunities for reinvesting that revenue to expand the business. In acquiring more unique users, the web space owned by each company has more leverage to demand higher advertising fees, which increases future revenue growth. It should then be no surprise that all three companies are heavily spending on development, marketing, and hiring new employees.

However, user growth is also important, and that is where Move falls short. Despite having more experience as a company, Move has been passed in terms of unique monthly users this past year by both Zillow and Trulia. As more users flock to each site, that leaves fewer users for Move, and more importantly, it gives less incentive for their paying advertisers to pay their fees when they can move to either Zillow or Trulia to attract more potential customers.

Can Zillow and Trulia go higher?
As long as Zillow and Trulia can show revenue, membership, and paying subscription growth, they are capable of seeing much higher share prices. Whether net income stays negative or possibly swings to the positive is just an added bonus of owning any of these stocks. However, if any of these three companies show a surprise to the negative in any category, the other two will likely also suffer in share price.

Nevertheless, the Internet age can only help both in acquiring more users. It is much cheaper, convenient, and more efficient to browse potential homes from the comfort of your computer than it is to drive around town for hours to visit just a dozen or so homes, at most, per day.

However, brand name is everything. Within any industry -- especially those related to the Internet based on history -- there are dozens of competitors that have faded in the background, were bought out, or were shut down. For every Amazon.com, there have been many extinct competing businesses that very few even remember today. While it is nice to produce a positive net income in the early stages of a growing company, it limits the ability to increase company reinvestment costs when the window of opportunity in some cases is a matter of months, not years, to build a solid user base.

Brand name is why I believe the online real estate marketplace is a race between Zillow and Trulia. Move is simply falling too far behind in terms of revenue and user growth, producing a gap that looks to only widen in the coming years.

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  • Report this Comment On August 30, 2013, at 1:47 PM, bearsnsox wrote:

    no they can not, this fad is being run up by irresponsible smaller investment firms (in my opinion)

    the revenues are high because both companies, especially zillow, has out of control spending, if you look at quarter over quarter the revenue growth is declining and is only sustained by rising spending, aka more call centers cold calling agents to try zillow out

    when the rates go up due to the fed cut back of the stimulus, ad spend by agents will decline and lead to lower revenue growth, that is why zillow is quickly trying to scoop up rental sites to get into a more stable rental cash flow business

    either way its a middle man business for both of them, they provide little value, have next to zero patents and their competitors have very little barriers to entry to this industry, so they will constantly be competing with many companies like them

    its a $20 dot come stock that is poised to crash and burn soon, in my opinion

  • Report this Comment On August 30, 2013, at 1:53 PM, mikecart1 wrote:

    Hi bearsnsox,

    Thanks for reply. You have some good points. However, I would also consider other social/online marketplace/review sites that have also saw their stock price increase dramatically this past year despite having negative earnings. Yelp is one that has seen revenue/subscribers go up.

    I wouldn't say it is a dot com stock since the business model has already shown to be working in the aspect of increasing subscribers/members/revenues.

    I'm not sure if rates going up will affect sites like Zillow in a negative way. That actually might help Zillow in a twisted way in that it will require future homeowners to do even more research than before to find the best deals that they otherwise wouldn't know about on their own without a site like Zillow or Trulia.

  • Report this Comment On August 30, 2013, at 2:11 PM, bearsnsox wrote:

    i would challenge your statement due to the following

    in the past couple months, applications for mortgages, refi's, housing starts, existing home sales, have all fallen....

    so thus a longer turnover for a property....which in turn hurts the cashflow of the real estate agent month to month since they have to wait longer to sell a place and collect their commission...thus i believe that they will cut back on their ad spend

    if you read the Q2 earnings transcript, the CEO was asked whether he thinks his company shared the same agents as trulia and move....he said he didnt think so, but didnt have any good evidence for it....so whats not to say that agents are using all three, and when hard times hit, they will cut out some of them, maybe zillow will be their go to, but maybe not since trulia seems to offer lower plans

    also subscriber growth and revenue growth are directly correlleted to their spend....if you look quarter over quarter whenever they slowed down on spending their revenue growth slowed down, that is because their product (unlike yelp and the other ones) can be obtained anywhere, they dont have anything proprietary, its a middle man business model of collecting data and spitting it out on a site, which anyone can do....also it is now being challenge more by Move inc, with their exclusive MLS deals...

    they know this, this is why they are targeting rentals now, their revenue streams are weak right now, mortgages will go down, subscribers will go down, they want to get into the steady month to month income from rentals, thats why they keep acquiring companies that are strong in the rental market

    zillow definitely has its place, but here is why they are a $20 stock, not this crazy bubble price of $95

    1. competitors have next to no barriers for entry, collect data, pay someone in india to spit it out on a website

    2. low to zero margins, its a business where they must spend millions upon millions on call centers to cold call agents and get them to sign up

    3. too many competitors in rentals, there are dozens upon dozens of regional rental sites and more and more pop up everywhere, zillow can not buy them all, and they will keep popping up because its so easy to get into this market

    4. trulia is growing fast and not spending as much, they almost have as many subscribers as zillow, so if i was a FOOL and had to put my money somewhere i would but it in trulia, who is showing growth by not spending as much

    5. yelp...linkedin...they all have revenue streams no matter what is going on, zillow is profiting from selling their internet traffic ranking to agents, but two things can happen, rates go up, consumers stop looking for places to buy, traffic goes down, agents spend less....or/and rates go up, real estate slows down, agents spend less, in turn lower's zillow's bottom line

    in my opinion this is not a "growth stock" anymore, or a hot internet stock as that dummy cramer says, who gets about 50% of his picks wrong, and no one ever calls it on him, this is a stock that is now showing declining revenue growth even while spending record amount of money and its a business model that is directly tied to the fickle real estate industry

    if anyone is long, they better either take their winnings or buy some options because i think in the next year itll be back down to 20 dollars a share

  • Report this Comment On August 30, 2013, at 2:21 PM, 45ACPbullseye wrote:

    @Mike, a very thoughtful and overall even handed view of this space. MOVE's realtor.com has just recently be given permission to become more competitive from the NAR board of directors. It will be interesting to see how it plays out. I also felt that the vast difference between P/S ratios of Z and TRLA as compared to MOVE could bode poorly moving forward for the high flyers. Best, Bill

  • Report this Comment On August 30, 2013, at 2:33 PM, mikecart1 wrote:

    @bearsnsox,

    While applications have fallen and may continue to fall now since the true nature of this economy might actually be revealed for the first time in years, I think being a top name in the industry (Zillow or Trulia) will still be around on speculation/potential. Yes, there are dozens of sites that do what they do but because they are the faces of this industry and all trends point up, they will not become another dot com.

    As for agents sharing the top 3 sites, your guess is as good as mine. However, the revenue for each company - even Move isn't identical. Zillow and Trulia can modify their revenue streams by adding services that are still in the brainstorming stage. You could even discuss NFLX and how for years they and the stock did nothing. But now they are doing things no one thought of before with original content. The old NFLX is gone (mailed envelopes) and a new NFLX has emerged. I wouldn't doubt Zillow or Trulia - being the top right now - to come up with other products or ways to produce earnings.

    Overall, convenience is key and based on other industries, people are willing to pay for convenience - even if it costs a little more.

    I think your points are great and I guess we will see who's predictions come true.

  • Report this Comment On August 30, 2013, at 2:40 PM, mikecart1 wrote:

    @45ACPbullseye,

    Thanks for reply. In my opinion, while that move by Move (hehe) might be positive and give them an edge, I think they have fallen too far behind. I truly believe in this market and among these social websites, the only thing that matters for now is user growth and revenues. I have seen far too often that sites that have not done either have gone extinct or were bought out. AMZN comes to mind.

    For many years and even to some extent today, the company produced no net earnings or neglible earnings. It was all about expanding, defeating competitors, low price beating, and repeat tactics. Some complain even today - especially after most recent earnings - that its been over a decade and it is still the same story.

    But I think people don't realize that when you take out the competition by attracting all the customers/users, you are able to then work on efficiency, improving margins, and producing positive returns.

  • Report this Comment On August 30, 2013, at 2:41 PM, bearsnsox wrote:

    i agree, if they can secure multi year deals like NFLX where after they have those deals they can get their margins up....but right now year over year both companies have not been able to do anything without 0 to negative margins, once they show they are a legitimate business model i will be the first to say yes they should be valued this high

    but right now i find it hilarious that fun managers are being so risky betting on companies with no proprietary technology, a mediocre service that dozens of other sites offer and hinging it all on subscriber growth and the chance they can add better revenue streams

    again they all have options that will let them cash in on a lot of money, but once they are out it will fall hard as the individual investor (in my opinion) could care about a company with negative earnings and in a very risky industry

    but i love when the CEO (every quarter) says, oh we can have great margins, but we choose to spend right now to get our name known, the real truth is that if they cut back spend their revenues will decline faster than the dow will correct after the Fed stops the stimulus

  • Report this Comment On August 30, 2013, at 3:32 PM, mittuh wrote:

    As en employee for one of the two main companies listed here, i will say that most of the top agents subscribing to our site for advertising are also paying to advertise on others. I dont have exact figures but would estimate it to be in the 50-60% range.

    The agents who dont typically have a bad taste in their mouth for the other site, IE Realtor.com burned me i will still with Trulia.

    Just an answer to your question, honestly Spencer Rascoff knows this too, just wanted to skate the question.

  • Report this Comment On August 30, 2013, at 3:43 PM, bearsnsox wrote:

    Just what I figured Mittuh. Everyone is flying high when agents have more business than they can handle and can spend on more than one site. As soon as real estate turns they will pull back and just go one site or two sites at lower sub levels. That's why I laugh when dummies like Cramer last night say that these stocks aren't tied to the real estate market. What an irresponsible statement. Too bad he has a flock of sheep that buy everyone of his crappy recommendations blindly

  • Report this Comment On August 30, 2013, at 4:02 PM, rianjones1983 wrote:
  • Report this Comment On August 30, 2013, at 5:02 PM, 45ACPbullseye wrote:

    One more thought for you guys to chew on: the life blood of these sites is access to listings in as close to real time as possible. In this regard, Z and TRLA are significantly behind MOVE, (the NAR relationship gives them direct feeds, plus MOVE owns one of the aggregators that Z and TRLA depend upon). I am not sure all of the "chess moves" have been made yet. In a related story, http://www.inman.com/2013/03/06/accuracy-zillow-trulia-listi... and

    http://www.inman.com/2013/07/31/zillows-point-man-with-mlss-... This game is still playing out in my opinion. Best, Bill

  • Report this Comment On August 30, 2013, at 6:51 PM, Jason91789 wrote:

    Fund Manger is artificially holding the price up because they see the growth rates. Just look at Angie's List just recently that stock hit almost $29.00 and angie list is selling a service that you can get for Free at Yelp. Could not believe that fund manger will own that stock either?

  • Report this Comment On August 31, 2013, at 12:20 PM, bearsnsox wrote:

    Exactly as soon as those managers see growth of revenue slow down further they will dump it and no one in the general public will pick it up. It's going to free fall

  • Report this Comment On August 31, 2013, at 2:44 PM, Jason91789 wrote:

    The Bubble will come, all the bulls will wonder where it all went wrong. It may happen a lot sooner.

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