Are These Real Estate Sites an Investment Opportunity?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Trulia (NYSE: TRLA) is trading higher by 26.62% on Thursday after the company posted an earnings report that easily exceeded expectations; Zillow (NASDAQ: Z) is trading higher by 14% in sympathy. After Trulia’s quarter, is this expensive growth space still a buy, and which is better, Trulia or Zillow?
Quarter at a Glance
Trulia’s headline numbers are very strong.
The company grew revenue 77% year-over-year to $29.7 million and boosted guidance above the consensus, thanks in part to a recent acquisition. Its very important Marketplace revenue, which accounts for premium real estate agent services, grew 89% to $20.9 million.
Trulia’s total subscribers increased 49% year-over-year, and revenue-per-subscriber rose 31% to $194.
A Concern to Monitor
Above, you can see the growth of Trulia, but Zillow also grew 70% during its last quarter. These companies have benefited from a housing market on the rise. However, I am concerned that Marketplace revenue for both Zillow and Trulia continues to outpace new subscribers.
For the most part, Trulia and Zillow are the same company. Both offer the same services, make money the same way, and follow the same pricing trends. Since Q1 2012, the average price that agents paid to use these services was $128 a month. According to Trulia’s quarter, that rate now sits at $194. With Zillow’s earnings on August 6, we don’t know the level at which Zillow has increased its rate, but my bet is the price hike is similar to Trulia’s premium.
Therefore, the question becomes how long and how high Trulia and Zillow can pump prices to use their services. Right now, the housing market is booming, but if the market’s growth decelerates, can we expect a decline in the price agents pay for services?
The Metric of Separation
Other than rising agent premiums, and high operating costs, I really don’t have any other major concerns for Trulia and Zillow. Both companies have produced great growth in both down and growing housing markets. Therefore, which stock is a buy?
With both companies having market-leading growth, and neither company having the best of margins, price/sales becomes the best metric of comparison.
Look, with high-growth companies, you are going to pay a premium and you aren’t buying a stock that has operational efficiency. Ideally, the potential for margin improvements exists, but in the case of Trulia, Zillow, and many others, it is still too early in the growth strategy to measure P/E ratios, cash flow, margins, or returns on equity.
Therefore, I turn to sales and growth relative to valuation. Like I said, both trade with near equal growth, but Zillow trades at 19.2 times sales while Trulia trades at 15.5 times its last 12 month’s sales. Clearly, this is still very expensive, as the S&P 500 trades at just 1.55 times sales and the technology sector is at 3.5 times sales.
To me, the difference between Zillow and Trulia is their valuation relative to sales. There are still a lot of unknowns with both companies, and at 19 times sales investors are taking a large risk that revenue can expand at great rates for many years in a row. With that said, 15.5 times sales is far from being cheap, but is less than other companies such as Yelp or LinkedIn. Therefore, for 70% plus revenue growth, Trulia’s premium may be a discount in this particular space.
One Lingering Catalyst
I have looked at current fundamentals and have attempted to determine an investment preference based on the only metric that separates one company from the other. However, it is important to note that both companies are changing rapidly, and are attempting to become more unique in the space.
Zillow has bought six small companies since 2011 and Trulia made a huge splash back in May with its $355 million acquisition of the real estate software company Market Leader. Since then, a debate has brewed between investors and analysts as to which company might acquire Move (NASDAQ: MOVE).
Move operates a number of online websites related to real estate, including Realtor.com. The company’s growth is slow, high single-digits, but the company trades at just 2.7 times sales and brought in $205 million in revenue in the last year. Move has a diverse offering of real estate options for homes, renting, senior living, etc. which could be valuable to either Trulia or Zillow. If this acquisition occurs, it could be the catalyst that separates one company from the other. Furthermore, the speculation of this acquisition has aided in Move’s 90% gain in 2013, as many believe that ongoing talks are present.
Right now, it is very early in the Trulia vs Zillow game, and I don’t really feel as though either company has created an identity. However, if I had to invest in one company right now it would be the cheaper Trulia, but I wouldn’t be surprised to see a larger and more cash-rich Zillow purchase Move. Therefore, future M&A can change my outlook.
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Brian Nichols 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!