Source: Zillow.

Internet real-estate specialist Zillow (NASDAQ:ZG) has been one of the biggest success stories of 2014, with its stock helping to lead the rising wave of interest in Internet-related stocks that have captured the best opportunities from the rise in social media and its connection to business activity. By connecting would-be homebuyers and renters with real-estate professionals to serve their needs, Zillow has captured a growing market, and its recent buyout bid for archrival Trulia (UNKNOWN:TRLA.DL) sent shares of both companies soaring as shareholders hope for benefits from synergies as well as the positive effects of reduced competition in the industry.

As the stock market has risen to record highs, though, investors have gotten more cautious about stocks in general and high-flying companies in particular. The big question Zillow faces is whether it can sustain its recent gains. Let's take a closer look at Zillow with an eye toward assessing whether it can build on its gains so far in 2014.

Stats on Zillow

2014 YTD Return


Expected 2014 Revenue Growth


Expected 2014 Adjusted EPS Growth


Expected 5-Year Growth Rate


Source: Yahoo! Finance. Excludes potential impact of Trulia buyout.

What's behind Zillow's strong performance?
For much of 2014, Zillow's high growth rate drove interest in its stock. Even as the bull market raged on, investors found fewer high-growth stocks available as attractive investments, and Zillow's record of impressive gains in revenue and adjusted earnings made it one of an increasingly rare breed of companies that could arguably justify high valuations.

But the biggest catalyst for Zillow's sharp move upward came in July, when the company announced that it would offer $3.5 billion in stock to acquire Trulia. Both online real-estate marketplace sites had posted impressive growth, with Trulia actually outpacing Zillow's growth rate in the recent past. The resulting jump in Trulia shares after the Zillow offer came as no surprise, given the typical premium to Trulia's prevailing share price before the bid. But Zillow's shares also soared, which is somewhat unusual in an all-stock deal.

Source: Zillow.

A couple reasons explain why the merger is so positive for Zillow as well as Trulia. First of all, from a consumer standpoint, Zillow hopes that the merger will have almost no impact on the customer experience. Zillow anticipates keeping the Trulia site as a separate portal rather than trying to incorporate the two companies into a single gateway, and both companies have assured investors that most of their respective visitors don't visit the other site. If both divisions of a post-merger Zillow can keep growing their target audiences, then the combined company could capture all the benefits of a merger without any of the potential downsides.

Moreover, after the merger, Zillow will be the obvious leader in the online real-estate market industry. Yet despite its larger size, Zillow will still be small enough for megacap companies in the technology sector to consider as an acquisition target in its own right. By maximizing market share, Zillow will be able to command a premium price from a potential buyer down the road, especially if it can keep its growth rate high.

Why Zillow's success isn't assured
Even after a potential Trulia merger, though, Zillow won't have completely defeated all of its competition. Other sites have started targeting niches within the real-estate market, and Zillow especially has to worry about its reliance on professionals who belong to the National Association of Realtors. If the NAR's website starts to enter the field as a true competitor to Zillow, then realtor-members will face a dilemma over whether to choose Zillow as an outside lead provider or stick with their own association.

Source: Zillow.

Moreover, Zillow has had trouble turning a profit on an unadjusted GAAP basis. Zillow has lost money in five of the past six quarters, and the company has greatly increased its spending on marketing and sales expenses. Technology and administrative costs have also risen, and while Zillow hopes that those expenditures will pay off in outsized revenue gains, it hasn't yet seen the reward from its higher spending. Investors fully expect Zillow to see the benefits of its investment in its own future, especially as it's necessary in order to keep the company ahead of its competitors, but it's not a certainty.

Finally, changes in the real estate market could discourage real-estate professionals from spending money on Zillow's services. That's a relatively remote possibility, though, not because real estate has to keep improving but rather because real-estate professionals are only going to get more dependent on technology. Nevertheless, if the market undergoes another big transformation as it did at the end of the housing boom, then Zillow could have trouble adapting.

The big picture for Zillow
Overall, Zillow has all the potential of a high-growth stock, along with the typical risks involved. If the Trulia merger produces the expected boost to its business, then Zillow could still see further upside even after its impressive gains thus far.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Zillow and Apple. The Motley Fool owns shares of Apple and 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.