Real Estate Sites Get a Survey Boost; But Will it Last?

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Fannie Mae’s December housing survey showed that 43% of people believe home prices will rise in the next 12 months; with 2.6% being the average expected price appreciation. Both numbers represent the highest in the history of the survey, a survey that started in 2010, and pushed shares of real estate website companies Zillow (NASDAQ: Z) and Trulia (NYSE: TRLA) significantly higher on Monday. However, the big question is whether or not it will last and if either are a good investment.

Over the last year, shares of large money center banks have been pushed higher as data indicates that the housing market may finally be on the rise. We have seen a continuous period of record low interest rates and in recent months housing prices have shown some upward revisions. Therefore, real estate sites had performed well throughout this period; that is until recently.

Up until the fourth quarter of 2012, Zillow was one of the better performing internet based companies in the market. Trulia operates with a near exact business model and began trading as a public company at the same time that shares of Zillow began to trade lower. As a result, Trulia has not been trading long enough for us to make any conclusions regarding its trend. However, because of its business model we can assume that the success of Trulia goes hand in hand with that of Zillow.

When the housing survey was released it made sense that shares of Zillow and Trulia would rise; Zillow by 6.76% and Trulia by 5.17%. However, we are yet to know how either company’s fundamentals will respond in a rising housing market. The problem with investing in either Trulia or Zillow is that assumptions regarding the housing market could be costly.

In the past, Zillow has thrived as agents have paid to market on the site in a down economy. Considering the fact that very few were buying homes, agents found it useful to pay a fee to be featured when consumers viewed certain homes in certain areas. However, it still remains a mystery as to what will happen if the housing market begins to rise. Will these agents feel the need to spend money to advertise on Zillow? Basically, we must wonder if real estate sites are only effective in a down economy, because at this point we have no way of knowing.

Zillow is trading with a three month loss of 17%, therefore some people believe it’s a strong buy; and its competitor Trulia is trading with a near 23% loss since its IPO. However, the metrics of these two companies must be explored:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Zillow</p> </td> <td> <p>Trulia</p> </td> </tr> <tr> <td> <p>Market Cap (millions)</p> </td> <td> <p>$1,060</p> </td> <td> <p>$506</p> </td> </tr> <tr> <td> <p>P/E Ratio</p> </td> <td> <p>740.74</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>Forward P/E Ratio</p> </td> <td> <p>64.49</p> </td> <td> <p>108.94</p> </td> </tr> <tr> <td> <p>Price/Sales</p> </td> <td> <p>9.66</p> </td> <td> <p>8.12</p> </td> </tr> <tr> <td> <p>Profit Margin</p> </td> <td> <p>6.17%</p> </td> <td> <p>(19.21%)</p> </td> </tr> <tr> <td> <p>Top-Line Growth*</p> </td> <td> <p>67.5%</p> </td> <td> <p>76.10%</p> </td> </tr> </tbody> </table>

*based on last quarter year-over-year

When you look at the fundamentals above for each company, you may not think that either is too expensive. After all, a price/sales between 8 and 10 is somewhat consistent with the internet company space. Both companies have strong top-line growth and I’d say much more attractive than recent IPO Workday and its 36.82x price/sales ratio and its far worse margins.

The key with these two companies is that when you compare them and consider the value of social media, neither look expensive, but the truth is that we don’t know how either will perform in a changing economy. Hopefully, agents will continue to spend the money on advertising, but I fear that both companies will see slower growth as it will be harder to attract new agents in a stronger economy. However, if I had to choose one I’d say the obvious winner is Zillow.

Zillow is the investment choice for me because of its margins and efficiency. Zillow is profitable with a profit margin of 6.17% compared to Trulia’s  negative 19.21% margin. Furthermore, Trulia’s last 12 months of revenue is nearly identical to Zillow’s revenue in 2011, and in 2011 Zillow reached profitability with net income of $1.1 million. Therefore, Zillow operates more efficiently and is the better company. However, this is a volatile space, one with performance that is unknown. As a result, I would be cautious with an investment and would watch for any signs of weakness if in fact the housing market continues to strengthen.  

BrianNichols 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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