Why Zillow, Inc. Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zillow, (NASDAQ: ZG  ) fell 10% Friday after fellow online real estate specialist Trulia  (NYSE: TRLA  ) turned in disappointing quarterly results.

So what: Keep in mind that Zillow already reported its own solid fourth-quarter results Wednesday after the market close. However, it remained guilty by association with Trulia, which plunged nearly 18% today after missing earnings expectations, and detailing plans for a new $45 million marketing campaign encompassing TV, radio, online, and mobile ads. 

Now what: While some analysts question whether Trulia is spending too much on its campaign relative to the size of its business -- which is almost three times smaller than Zillow in terms of market capitalization -- the new ads have also sparked some concern, because they'll likely be pitted directly against those from Zillow.

But I still don't think Zillow investors should read too far into today's drop, especially considering this kind of competition is par for the course in the real estate industry. In my view, Zillow is still the market leader in the online space, and it'll take a lot more than a competing advertising campaign to oust it from its position.

If that wasn't enough, remember that on Wednesday evening, Zillow management also said they'd be increasing their own advertising investments to $65 million across all channels this year, including a fresh push in TV after intentionally advertising lightly in the medium during its seasonally slow Q4.

I think today's pullback for Zillow is little more than a knee-jerk overreaction, and could be a fantastic buying opportunity for patient long-term investors.

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Read/Post Comments (4) | Recommend This Article (4)

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  • Report this Comment On February 17, 2014, at 11:11 AM, bearsnsox wrote:

    so does the Motley Fool pay you extra to write "pump up" articles on stocks they own as soon as those stocks take a dive? since its in their best interest to have an article out there like this say "dont worry everyone" ??

    ill have to disagree with you, this wasnt a knee jerk reaction, the 4th quarter results showed slowing growth in web page hits, page hits that brought opportunities and lastly real estate subscription growth

    then zillow went onto decrease yearly growth, in '13 they grew ~69% over '12, and in '14 they are estimating only growing 48%, but they are increasing spending, why??? because they have to do anything possible to keep that growth going and as you can see the fad is over and growth is going to come tumbling down

    now you add in the Trulia is going to increase their spend and take even more market share from Zillow, which is already fighting for a small pie

    that is why Zillow is desperately trying to go into other sectors like rentals because they know this is a small space and their huge growth which gave them this absurd stock price is going to stop soon and they want to do a lot more inside selling before it all comes tumbling down

    thats the real take on what happened, the stock didnt move at all after those "impressive / solid" earnings as you state, everyone was waiting to see what Trulia was going to do, and no surprise the big boys dumped the stock and no one was there to pick it up, you can have all the little hedge funds put out their pump and dump price points of $110 but when the big banks like GS say you are a $75 stock thats where the market is going to drive this down to, and after Q1 results come out i imagine it going to $50 then eventually $20

    so you say its a great buying opportunity, i say its a great short selling opportunity

  • Report this Comment On February 17, 2014, at 10:38 PM, donkeypoxx wrote:

    Worthless company, they don't have any proprietary information, all they have is publicaly available info. The minute they try to charge anything Trulia or another competitor steals market share. This is a dying business.

  • Report this Comment On February 18, 2014, at 11:34 AM, TMFSymington wrote:

    @bearsnsox: Nope, we have no party line (see here: ), and get paid to offer our own opinions regardless of whether it happens to coincide with the analysts in TMF's premium services/real-money portfolios. Just so happens I agree in this case.

    Also, it seems you're assuming only one company (or no companies) can succeed in online real estate. Keep in mind, however, as of last month Zillow only held around 2% of the $10 billion in advertising $$$ agents spend annually.

    Hardly a "small pie" to share.

    Thanks for reading and Fool on!


  • Report this Comment On February 18, 2014, at 6:08 PM, bearsnsox wrote:

    hard to believe that since you obviously dont look at the numbers, first off the $10 billion has been all over the place, the CEO tried to pump up his company by saying 10, then 20 then 30 at one point, its laughable, they dont know their market size because the market is ever changing due to macro economics of real estate and marketing

    their revenue growth peaked in 2011, now its been declining, down to 69% this year and by their estimates 48% or so percent next year, still great growth, but shrinking future P/E will send the stock down, especially when they cant get their spend under control, they say its due to "brand awareness" but anyone who knows the company knows its cause they have little to offer than any other company out there, the thing that drives their business is data that is available to dozens of other companies

    so now they are sitting back and printing stock and rewarding themselves, when is the last time management made a significant stock purchase??? its all been INSIDER SELLING!!!

    the run is over, real estate is cooling and as you can see if you bothered to look at the report, their top line revenue growth is decreasing while they desperately try to keep it going by spending more and more, well Trulia just hit on the gas pedal too and that 10 billions, which is a joke, probably 1-2 billion in reality, is a finite market

    the pump up small hedge funds that put the $110 price tags on them will soon abandon them and then who is going to catch all that stock that is dumped??? GS is a credible firm and they said $75 and im guessing they will keep decreasing their number after every 2014 quarter

    if you want to read a good article about the reality of a company like Zillow, which is a middle man company that will only ever has small margins read this:

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Steve Symington

Technology and consumer goods specialist for the Fool. Steve looks for responsible businesses which positively shape our lives. Then, he invests accordingly. Enjoy his work? Connect with him on Twitter & Facebook so you don't miss a thing.

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