Move (NASDAQ: MOVE ) shares spiked 8% on Tuesday following news of a potential buyout for $18 per share. The day prior, Canaccord boosted the price targets of peers Zillow (NASDAQ: ZG ) and Trulia (NYSE: TRLA ) , and noted that a future merger is possible. Therefore, with takeover chatter in full swing within the online real estate space, which scenario makes the most sense, and are any of them likely to actually occur?
Similar platforms, different models
Zillow, Trulia, and Move all operate online real estate marketplaces, but with very different strategies. Zillow and Trulia are the most similar, as both generate the majority of their revenue from real estate agents who advertise and market on their respective platforms.
Zillow created 69% of its $66.2 million in first-quarter revenue from real estate agent marketing and advertising. Trulia depends on this practice to an even large degree, as it created nearly 90% of its $54.5 million in quarterly revenue. Zillow's remaining revenue came from display advertising and its mortgage marketplace.
Meanwhile, Move generates more than three-quarters of its revenue from social media-like advertising on its site, and the remainder from software-as-a-service. Granted, Move's single-digit top-line growth significantly lags the likes of Zillow and Trulia, which are expected to grow revenue 56% and 75%, respectively, this year.
Pricing remains too strong
With all things considered, the investment implications are easy to figure. According to Canaccord, a Zillow-Trulia merger would create more pricing power for their key marketing service with realtors. Zillow and Trulia have consistently increased fees for realtors, with Zillow increasing its average price 10% year over year to $286 during its last quarter.
Therefore, despite competition between Zillow and Trulia, both companies have managed to grow unique monthly users and increase the number of realtors willing to pay increased prices for premium services. However, until either company begins struggling to grow while raising prices, it's tough to imagine a scenario where a buyout could occur.
What about Move?
Move is a rather interesting acquisition target because its business model is so much different than its peers'. Its revenue-generating services are completely unlike those of Trulia or Zillow, so you have to believe there are some synergies in utilizing both revenue-creating approaches on two different sites to spark growth.
Also, Move is a distant third in monthly visitors to its site, but significant nonetheless. Zillow and Trulia had 81.5 and 51 million unique visitors, respectively, in the month of May. Move doesn't announce monthly metrics, but to end the first quarter, it had a record 33 million in March. Therefore, Move has a large user base to monetize with premier agent advertising and marketing.
Lastly, Move could be acquired very cheaply. The company trades at 2.5 times sales, while Zillow trades at 23 times 12-month sales. Essentially, there is a lot of value in both Zillow and Trulia, and in the possibility of acquiring a company of similar size for a major discount, relative to sales.
What to do?
The investment thesis for either Zillow or Trulia is relatively simple -- both companies capture a small percentage of real estate agents who pay for premium services, which leaves room for growth. Zillow has 52,968 premier agent subscriptions out of 675,000 total agents who have profiles on its site. From its premier business, Zillow created $46.2 million in first-quarter revenue.
Even if Zillow's number of subscriptions tripled, as would revenue, its market capitalization of $5.1 billion would still be a hefty premium. In other words, Zillow needs an even larger platform, and Move could accommodate this need. As a result, Zillow acquiring Move is a very possible scenario.
Trulia acquired Market Leader last year, which caused it to raise debt. Therefore, it's unlikely that Trulia would actively seek to acquire Move, but with Zillow trading at all-time highs, and with no debt on its balance sheet, Move looks like a golden opportunity to broaden the overall size of Zillow's platform
If not, it's difficult to imagine a scenario where Zillow could ever fundamentally support a $5 billion market capitalization. However, by acquiring Move and nearly doubling the size of its existing business, Zillow might be able to create long-term value for shareholders.
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