When real estate treasure trove Zillow (NASDAQ:ZG) had its IPO in July 2011, it did so with barely a splash. Few knew about it, and even fewer (perhaps justifiably) wanted anything to do with real estate. But oh, what a difference a year and a half makes. Now, the company has seen some spectacular returns, and if it plays its cards right, these impressive financials could continue on an upward trajectory, just as long as the housing market stays the way it is. Whether you're looking for a new place to live or a new stock to be excited about, here are some reasons you should pay attention to Zillow.
The financials don't lie
Since 2010, Zillow has seen its revenue expand almost three times its size, jumping from $30 million to $116 million. Its margins may seem small, but they're still impressive. The company's net income went from negative-$6.7 million in 2010 to $5.9 million in 2012. That resulted in only a 5% net profit, but that's a heck of a lot better than the negative-22% margin in 2010.
Right place, right time
How does an online real estate marketplace generate revenue? In Zillow's case, by selling individual subscriptions to mortgage brokers, real estate agents, and brand advertisers. These clients can then post property openings as they find them and quickly find potential residents to fill them. Zillow also offers a more appealing layout and general user experience than the Internet's best-known marketplace, Craigslist.
To get as much traffic from interested homeowners as possible, Zillow has been pouring most of its revenue into sales, general, and administrative costs, which include advertising on everything from television to Words With Friends. With so much revenue and so little in the way of earnings, Zillow's P/E has skyrocketed to 289, even though the industry average is around 30.
Zillow a zippy stock?
Even though its P/E looks overvalued, Zillow is still the stock to watch when it comes to online real estate markets. In 2012, the company made $50 million more in revenue than did rival business Trulia (UNKNOWN:TRLA.DL). In addition, its spike in advertising dollars could lead to even more traffic, which could interest even more real estate agents and create a solid cycle of sales for the company. It's a buyer's market in the real estate industry, and Zillow has its finger squarely on that market's pulse.
Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Zillow. Try any of our Foolish newsletter services free for 30 days. 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.