Zillow Eyeing Trulia In Effort to Takeover Online Real Estate

The combination of Zillow and Trulia could shake up real estate for good.

Jul 24, 2014 at 3:30PM
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Once again the Dow Jones Industrial Average (DJINDICES:^DJI) and stock markets in general are reacting nonchalantly to growing geopolitical tensions in Eastern Europe and the Middle East. However, all three major U.S. indices slipped into the red in late trading Thursday.

On the domestic front, new jobless claims dropped by 19,000 to 284,000 last week, the lowest level in eight years and the latest sign that the economy is on the mend. We've seen slow but steady improvement in the jobs market over the last few years, and it appears that even more momentum has picked up in the last six months.  

Meanwhile, headlines at midday were focused on the potential merger of online real estate companies Zillow (NASDAQ:ZG) and Trulia (NYSE:TRLA), which dominate this emerging side of the market.

What a Zillow-Trulia merger would look like
Bloomberg reported that Zillow is looking to acquire Trulia in a deal that could value the target company at nearly $2 billion. The stocks were up 14% and 32%, respectively, so the market is seeing both companies as winners in a takeover.  

What would these companies look like together? Below is the current market cap (post stock pop), revenue, and income data from the two companies.

 

Zillow

Trulia

Market Cap

$5.90 billion

$2.05 billion

Revenue (ttm)

$224.8 million

$174.2 million

Net Income (ttm)

($15.0 million)

($30.9 million)

Source: Yahoo! Finance.

Clearly this acquisition wouldn't be made based on Trulia's earnings, because there aren't any. But Zillow sees Trulia as a real rival in the online real estate market, and together they could increase scale and reduce competition.

Housing Image Tmf

A recovery in housing has fueled Trulia and Zillow's growth and their potential merger. Photo: The Motley Fool.

The scale side is incredibly important because the companies are both partnering and competing against a well-established real estate market that controls how the industry works. But the online marketplace they're building needs both users and real estate companies to advertise to survive. In this respect, they have a network effect in which the more users they have the more real estate professionals they'll attract, and vice versa. So, yes, scale is important and the combined company may indeed be worth more than the sum of its parts.

Scale may also be important in the future as a combined Zillow/Trulia offers more online realty services to consumers looking to rent or sell homes. They're starting to offer these services as an alternative to using a real estate agent, but it's not a big part of their business yet.

Despite the fact that neither of these companies were profitable in the last year I think a tie-up makes a lot of sense for them and for consumers. The real estate business is due for a shake-up, and Zillow and Trulia could be the ones to deliver it.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends 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.

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