An Identity Crisis or Buying Opportunity?

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The last thing that the global economy needs is another housing bubble similar to the one that sent the U.S. market adrift. Nonetheless, according to a recent Goldman Sachs report cited on CNBC, there could be such bubbles forming in certain economies of the world, including Canada and Australia. The report suggests that an easing in monetary policy protected certain countries from buckling during the recession all the while allowing  home valuations to give way to potentially unreasonable and damaging increases.

In the U.S., home prices are increasing -- considering the 7.6 percent increase in the median U.S. home price in the 3Q over the same period in 2011, according to the National Association of Realtors -- while interest rates remain at rock-bottom levels. The U.S. Federal Reserve remains dedicated to keeping rates suppressed, creating ideal conditions to obtain or refinance a home mortgage, noted Bill Emerson, chief executive of Quicken Loans, in a CNBC interview.

Indeed, many individuals are choosing to do just that, as estimates for 2012 mortgage originations were recently revised upward to $1.7 trillion, including $1.18 trillion worth of refinancing activity, according to the Mortgage Bankers Association. Still there are those in the other camp that, despite attempting to take advantage of the low rates, do not qualify for a mortgage.

Tree.com (NASDAQ:TREE) chief executive Douglas Lebda recently explained to CNBC that much of the mortgage activity is stemming from businesses and others that are scooping up foreclosed properties. Lending Tree might have been facing an identity crisis of its own prior to selling its mortgage origination business in the 2Q, and now boasts of a new identity as a "pure-play marketing performance" business.

The recently announced combination of Priceline (NASDAQ: PCLN) and online travel company Kayak Software (NASDAQ: KYAK) in a $1.8 billion deal seems to have adequate synergies and the buyer clearly wants a piece of the online travel pie. Nonetheless, the acquisition is surprising if only because Kayak has only been a publicly traded company for less than one year. Prior to the deal announcement, Kayak's stock was trading near IPO levels at about $31 per share.

 Identity Crisis?

I remember when shares of Time Warner/AOL -- when it was one combined entity -- suffered from an identity crisis. I don't think that real estate information company Zillow (NASDAQ: Z) is suffering from a perceived crisis of identity, but the company may not be communicating its business model well enough to investors. Shares are off 30 percent in the month of November alone.

In the 3Q, Zillow performed on all counts -- delivering bottom line and top line growth over 2011. It was a record-setting quarter for revenues, which increased 67 percent over the same period a year ago to just under $32 million. Net income also set a record at $2.3 million or $0.07 per diluted share.

Zillow revised its 4Q revenue outlook amid a forthcoming seasonally weak quarter for ad sales -- a non-core business for Zillow -- based on a CNBC interview. The stock went reeling despite the fact that Zillow still expects to grow sales more than 50 percent versus last year. So what gives? The problem may be due to a lack of clarity surrounding the company's operations.

At first glance, Zillow's home page resembles a search engine for real estate -- and that description is not that far fetched. It provides information on anything from homes for sale and apartments for rent to mortgage and refi-rates. Sales are divided into two business segments: marketplace revenue and display revenue.

Marketplace revenues are generated from subscriptions that Zillow sells to real estate salespeople coupled with advertisements that are sold to mortgage professionals. The real estate subscriptions are tiered from silver to platinum. Based on the subscription type, the service provides agents a mobile and Internet presence in towns and cities that are relevant to them. Mortgage lenders pre-pay for ad space, and Zillow's income stream from this segment is based on customer views of the Zillow-powered mortgage ads.

Display revenues are produced by mobile and Internet ads that are sold to both real estate market participants in addition to outside advertisers, ranging from automobile to technology companies.

Growth in Zillow's display revenue business is contingent on the real estate industry's shift in ad spending from traditional sources of advertising, including print publications, billboards and television to mobile applications and the Internet, according to the company's 10-Q filing.

Zillow executives maintain that they can grow in either a flat or booming housing market, but admit they are poised to benefit from a projected 2 percent increase on average in U.S. housing prices over the  next year, based on an interview with CNBC.

The recent sell-off in Zillow shares may be overdone given the timing of the company's earnings results. Zillow reported its 3Q earnings during the week of the U.S. elections, which could have added to the selling pressure given the markets behavior during the week -- the Dow Jones Industrial Average dipped below 13,000.  If the company can do a better job of communicating its business model -- given the growth potential in the mobile real estate market and understanding that market professionals are mobile creatures -- the recent pullback in Zillow's stock could in fact be a buying opportunity. 

 


GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com and Zillow. Motley Fool newsletter services recommend Priceline.com 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.If you have questions about this post or the Fool’s blog network, click here for information.

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