Don’t Be Fooled by Zillow’s Recent News

Zillow responded well following back-to-back headlines to close last week, but compared to its peers, its upside is minimal.

Apr 6, 2014 at 10:18AM

While companies like Move (NASDAQ:MOVE) and HomeAway (NASDAQ:AWAY) have fallen steeply with the Nasdaq sell-off, Zillow (NASDAQ:ZG) and Trulia (NYSE:TRLA) have surprisingly held up well. In particular, Zillow has gained 8% in the last month, while Trulia is up by 6%, all during a period where the Nasdaq fell by more than 5%. The reason for this performance -- more specifically, last Thursday and Friday -- should not be celebrated too enthusiastically.

Different but very similar
Zillow and Trulia are near equals, operating online marketplaces of homes for sale and for rent, and earning the majority of their revenue from Realtors who pay to advertise. Move owns and, offering a service similar to Trulia and Zillow. However, Move also operates a software-as-a-service segment, somewhat separating it from its peers. HomeAway is an online marketplace for vacation getaways, including lodging and vacation planning.

While each company has its differences, all operate in the real estate space and serve as marketplaces. And while Zillow and Trulia have traded higher over the last month, Move and HomeAway have lost 14% and 27% of their valuation, respectively. Granted, Trulia did fall nearly 4% on Friday, meaning its days of trending against the index may be coming to an end.

Zillow, however, has been very resilient, allowing it to trade higher during the widespread sell-off, and it appears this performance really comes down to two specific headlines.

Two headlines, but are either meaningful?
On April 3, Zillow announced a partnership with E-House's Leju to build a platform for its Chinese visitors to search U.S. real estate. Then, the following day, Zillow announced monthly unique user data for March, showing a 17% increase over February. While this news may be good, neither is significant enough to help Zillow maintain its hefty premium in the face of a large correction in momentum stocks.

In regards to the Leju news, investors should note that China's interest in U.S. property is naturally very small relative to purchases made by U.S. citizens. Zillow says Chinese buyers spent $11 billion on U.S. homes in 2012. In comparison, Move's disclosed current U.S. inventory at nearly $350 billion in February with an average turnover rate of 114 days.

In total sales from new home purchases in the U.S., that figure is much higher than the inventory in February. However, this gives you an idea of how small $11 billion in purchases is to the total U.S. market. And since Zillow earns its revenue via Realtors and other real estate professionals, investors must wonder how fundamentally impactful this news will be for the company. While this answer is unknown, $11 billion in real estate sales doesn't look to be a number that will drive significant revenue growth for Zillow.

Then, there's the 17% increase in monthly unique users in March versus February. While this is good news, investors must remember that there were three extra days in March. In percentage form, March had about 10% more days than February. Zillow's 17% increase sounds better than it really is.

Best-performing, but worst value
Zillow's been lucky enough to have catchy headlines at a bad time for dot-com stocks. As a result, it hasn't corrected with the rest of the industry, and now trades at a rather lofty 18 times sales. And while Zillow is growing fast -- analysts expect 49% revenue growth in 2014 -- investors should note that it's not profitable.

In fact, Zillow's operating margin has gone from 4.9% in 2012 to negative 8.4%, despite continuously increasing its charges to real estate professionals. How much longer can Zillow boost its marketing prices and sustain its stock gains in the face of large dot-com declines?

With all things considered, Zillow has performed the best among its peers, but likely has the least upside. For example, Trulia is growing faster -- 72% revenue growth is expected this year -- and it trades at a rather reasonable nine times sales. Like Zillow, the most significant hit at the company is its margin -- negative 12.5% -- and the fact that its operating margins have shown essentially no improvement over the last three years. Still, at nine times sales with faster growth, Trulia likely has more upside than Zillow.

Then, there's HomeAway and Move. In regards to HomeAway, it has very consistent top-line growth of 25%, also trades at nine times sales, but has operating margins of nearly 11%. Move's 12.5% revenue growth may not look impressive, but it sells at just two times sales, is profitable and has improving margins. It's fairly valued, if not undervalued.

Final thoughts
If Zillow were to trade higher from this point forward, investors would have to believe that the upside is minimal. In the meantime, Trulia, Move, and HomeAway are three companies that have performed worse, but look to be far better options.

With that said, considering the widespread losses in momentum stocks, Move and HomeAway look especially attractive following the last month. Specifically, the profitability, balanced growth, large losses, and fair valuation make both stocks appealing once this technology free fall comes to an end.

3 stocks poised to be multi-baggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends HomeAway and Zillow. The Motley Fool owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information