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While companies like Move (NASDAQ: MOVE ) and HomeAway (NASDAQ: AWAY ) have fallen steeply with the Nasdaq sell-off, Zillow (NASDAQ: Z ) 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 Move.com and Realtor.com, 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 Realtor.com 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.
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.
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