This Company Wants to Bank on Real Estate

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What's one company that just had a great quarter and rhymes with "willow"? Online real estate listing app Zillow (NASDAQ: ZG  ) reported record quarterly revenue, record agent acquisition, and a coveted spot on the main stage during Apple's iOS 7 presentation.

Apparently it takes much more than that, however, to impress the market. Between Nov. 5 and Nov. 7, the days before and after the positive earnings call, Zillow stock dropped 9%, and within two weeks has already reached a higher high and a lower low. Does Wall Street know something about this company that we don't, or is this roller-coaster stock performance just a random occurrence?

Selling like hotcakes
In Q3, Zillow saw the rise of many crucial metrics. The company's revenue jumped 67% to $53 million. That boost in sales was largely due to a 73% increase in Zillow's marketplace revenue (thanks to higher real estate sales), to $40.9 million, as well as a 50% increase in its Display segment, to $12.4 million. Zillow also reported an 18% net increase to its database of premier real estate agents, and a total of 44,700 Premier Agent subscribers, up 67% compared with this time last year.

Sales have grown like a weed, but farther down Zillow's income statement, things start to look slightly stormy. The company spent $58.8 million last quarter in total costs and expenses, more than doubling its sales and marketing expenditures, along with general and administrative. This sent its profit margins spiraling into negatives, but the company managed to beat its own expectations with adjusted EBITDA, which came in at $4.1 million compared with an expected $1.7 million. 

Where the money went
This quarter's expenses might not have been in vain. In August, Zillow spent $50 million in cash on StreetEasy, the top real estate website in New York City, which currently draws more than 1 million monthly unique users.

Zillow is also currently the largest company of its kind within the online real estate industry, two times the size of its closest competition, Trulia (UNKNOWN: TRLA.DL  ) , and four times the size of its No. 3 rival, Realtor. However, while Zillow is so much larger than Trulia, their revenue was much more evenly met last quarter. Trulia reported $40.3 million in sales, and kept $18.4 million of that as net income. Even though Zillow beat on sales, its net profit was much smaller in comparison, because of continued marketing and research efforts.

Should you buy?
While Zillow accomplished a lot within the past quarter, the company was forced to spend a lot to do so, and in a difficult industry, no less. Let's also not forget that Zillow has been around since only 2005, and such a young company is sure to face its share of stock volatility, especially in the still-recovering mortgage and rental industry.

However, though the industry terrain is shaky, Zillow is still the top dog within it and is also constantly thinking of new ways to expand its influence, whether through becoming a featured application during an Apple iOS presentation, to snagging a primetime feature on ABC World News With Diane Sawyer, to having a Google hangout with FHFA to explain the government's refinance program. That kind of embrace of original thinking could broaden Zillow's audience and perhaps lead to ever-expanding returns as the housing market continues to recover.

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Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 04, 2013, at 9:43 PM, Surbiton99 wrote:

    How many more pump and dump articles on Zillow can The Motley Fool publish without attracting the attention of the SEC? It's noticeable that all negative factors are excluded from the "record this, record that comments". Why not mention to potential investors that Zillows Unique Users numbers slumped by 8.3% in September and a further 2% in October despite spending $8.4M on a nationwide TV Ad campaign in the 3rd quarter. Zillow hasn't published November Unique User numbers yet so it will be interesting to see if they manage to stop the slump. Even more worrying for Zillow is that Alexa shows a big drop off in User time on Zillows website as well as the drop in User numbers. The only number that seems to be increasing is the number of Users accessing Zillow from India & Pakistan which is now 3.6%, and with Zillow having No operations there doesn't earn any revenue on this fastest growing segment of Users.

  • Report this Comment On December 05, 2013, at 4:58 PM, Surbiton99 wrote:

    Update: Zillow have reported that Unique Users SLUMPED for the 3rd successive month in November with a 5.3 million drop from October to an embarrassing 52.769 million users. That's an 11 million (17%) drop in Unique Users since the peak in August. Let's hope that Analysts now start asking 'real questions' from CEO Spencer Rascoff instead of the suck up 'aren't you guys wonderful' comments that seem to be the order of the day.

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