After several days of speculation, Zillow (NASDAQ:ZG) just confirmed the purchase of rival Trulia (NYSE:TRLA) for $3.5 billion in stock. On the heels of great quarters for both companies, the deal creates an even stronger online real estate marketplace -- all under one roof.
Two strong former competitors
Zillow posted a solid fiscal first quarter two months ago, bumping up revenue 70% year over year to $66.2 million. Its web and mobile traffic in April hit 79 million unique monthly visitors, a 50% increase from the previous year, and subsequently increased to 83 million unique visitors in June.
That likely helped increase marketplace revenue -- the company's major revenue creator -- from $31 million to $53.5 million year over year. According to Zillow Chief Revenue Officer Greg Schwartz, this revenue segment "includes local advertising from real estate agents, from mortgage brokers, banks, and brokerage firms -- which is our largest and dominant revenue stream."
Trulia posted its own strong fiscal first quarter back in April as well. The company's quarterly revenue was $54.5 million, up 127% year over year. Trulia said its marketplace revenue will account for 80% to 85% of total revenue in fiscal 2014.
Of course, past quarters don't predict how well the companies will perform in the future, but there are a few major areas of growth as the companies move forward together.
In an SEC filing this week, Zillow said the companies' combined revenue accounts for just 4% of the estimated $12 billion real estate professionals spend on marketing to consumers every year. That means there's still a lot of room for advertising growth as Zillow and Trulia combine their revenue-generating efforts.
To earn a bigger piece of the advertising pie, Trulia and Zillow need to continue growing their Web traffic. So far that has hasn't been a problem. According to ComScore data (reported by Bloomberg), Zillow accounted for 89% of all traffic to the top 15 real estate websites in June. Trulia, for its part, increased monthly unique visitors by 42%, year over year in the first quarter.
Zillow claimed the two companies "have limited consumer overlap." The company said about half of Trulia's monthly visitors don't visit Zillow.com, while two-thirds of Zillow's monthly visitors don't access Trulia.com. Zillow thinks this is an advantage as both companies will retain distinct brands after the deal closes.
The company said in a filing this week, "Maintaining the two distinct consumer brands will allow the combined company to continue to offer differentiated products and user experiences, attract more users and maximize the distribution of free content across multiple platforms, apps and channels."
To make this happen, Zillow and Trulia will have to do several things. The first order of business will be to share real estate market data and housing trend forecasts. Both companies provide their own separate data and analysis right now; bringing all the data together should present a clearer picture for users, and hopefully increase Web traffic as a result.
The deal will also combine marketing efforts. Zillow expects to share advertising platforms between the two companies, which it said will increase a real estate agent's return on investment. As the ROI increases for advertisers, Zillow and Trulia will look for additional advertisers to sign up for the services.
In addition to these benefits, the companies expect the two independent brands operating under one organization to create an annual cost savings of $100 million starting in 2016.
Though both boards have approved the deal, it won't actually close until 2015. After it does, Zillow shareholders will own about 67% of the new company, with Trulia investors taking the remaining 33%. I think once the two companies begin tackling the online real estate market together, most of the above opportunities will start taking shape.
When the new changes go into effect, the two companies should be able to push their combined revenues of $500 million to $600 million much higher, and take a bigger slice of the massive real estate advertising market. Though Zillow estimates that market to be about $12 billion annually, Trulia's chief financial officer said it could be worth up to $28 billion. Whichever number is more accurate, it's clear the two companies have a lot room to grow together.
Chris Neiger 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.