3 Takeaways From Zillow's Earnings

The solid earnings report continues to point toward Zillow emerging as the dominant player in the online real estate sector based on the three key takeaways.

Feb 19, 2014 at 11:00AM

Now that Zillow (NASDAQ:ZG) has sold off to the tune of 10% following competitor Trulia's (NYSE:TRLA) earnings, investors need to refocus on the solid takeaways from Zillow's own strong earnings.

Zillow and Trulia are battling in the rapidly developing online real estate market with Realtor.com operator Move (NASDAQ:MOVE). By total traffic metrics and market capitalization, Zillow is the leader in the sector, but the competitors are spending heavily in an attempt to close that lead. The key takeaways from the fourth-quarter earnings report is that Zillow continues to expand the leadership position in traffic to real estate sites.

The spoils to becoming the top destination for the real estate sector are valuations similar to other market leaders, such as Priceline.com in online travel and LinkedIn in online networking, that amount to values in excess of $20 billion. Whether online real estate develops into that market size is still a question, but investors should understand that grabbing market at the cost of profits is still a priority at this stage of development.

More visitors, better growth
Maybe the best predictor of the future leader in real estate is the monthly unique visitor total. For January, Zillow set a traffic record at nearly 70 million unique users. For the fourth quarter, traffic grew 57% to reach 54.4 million monthly unique users. ComScore now places the total traffic at double that of Trulia.com and more than twice that of Realtor.com.

Trulia generated monthly unique visitors of only 35.3 million in the fourth quarter. Though the number increased 49% from the same period last year, it significantly trails from the size and growth rates of Zillow.

Move saw monthly users only increase 13% over last year to 23.9 million. Though the company expects that some technology integrations and content offerings laid the foundation for 2014 growth, Move appears too far back in third place to grab back market share.

There's consolidation in the cards
Even more interesting is the comScore estimate that Zillow only reached 42% of the 77 million total unique users to real estate-related websites during December. While the market share was double the competitors', it still highlights a very fragmented market. Ultimately, the real estate market is one where a dominant player should control more than 80% of the market.

Buyers and sellers of real estate want one destination site. The confusing point in the middle is the agents that want real estate consumers to visit their own websites to view their own housing inventory. No one in the market to buy a house wants to view multiple websites.

Both Trulia and Move obtain substantially larger portions of revenue from providing services for realtor agents. In fact, Move forecast 2014 revenue to reach more than $254 million, but it amounts to less than 12% growth from the $227 million generated in 2013. The revenue number isn't far from the nearly $300 million expected out of Zillow. The numbers, though, suggest a market quickly shifting toward the category leader in Zillow.

Better revenue per subscriber
Zillow saw Premier Agent subscribers grow another 3,500 in the fourth quarter of 2013 to reach 48,314. In total, the Premier Agent subscribers increased 64% year over year. Zillow saw a slight increase in average subscriber revenue to $271.

Trulia saw total subscribers increase to 59,700, but the increase was only 3,300 for the quarter. Average monthly revenue per subscriber only reached $179, a 4% increase from last year. The number is still considerably shy of the numbers reached by Zillow.

Bottom line
The industry is quickly moving toward Zillow dominating the user totals and eventually dominating the industry ad spending. If the users who want to conduct real estate transactions are active on Zillow, then the real estate agents will have no choice but to abandon individual listing networks. In the end, the likelihood exists that 80% of the monthly unique users on real estate websites will use the market leader. At this point, the leader is Zillow and it deserves the premium valuation.

Investors might question the $3 billion valuation for a company only expected to generate $300 million in a highly competitive industry, but the same valuation questions continuously pop up surrounding LinkedIn and Priceline.com. Those online leaders quickly surpassed a $3 billion valuation and never looked back.

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Jun 12, 2015 at 5:01PM

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