Is Zillow Zooming Past its Competitors?

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

Note: A previous version of this article inaccurately described Zillow's website. The error has been corrected.

With the housing market picking up again in the United States, investors are now focusing on companies that are directly benefiting from the recovery. Investors have usually been looking at big builders, such as D.R. Horton, or home improvement retailers, such as Home Depot. Some more experienced investors are loading up on REITs.

However, there’s one industry where housing and tech - two hot markets - intersect: online real estate search websites. Over the past five years, more prospective home buyers are taking advantage of the Internet’s search capabilities to narrow down searches quickly. At the forefront of this revolution is Zillow (NASDAQ: Z).

What is Zillow?

Zillow was founded in 2005, and since then has become one of the most-visited real estate search websites in the United States. The website is a place where brokers, agents and homeowners can post for-sale and for-rent homes. Over 100 million homes are listed on Zillow - including homes for rent, sale and foreclosures.

The company also operates Zillow Mortgage Marketplace, where borrowers can instantly connect with lenders to be pre-approved. Buyers and sellers can also seek advice in its Zillow Advice forums.

The company generates revenue by connecting home and mortgage shoppers with professionals and through selling targeted advertising to real estate professionals.

Fourth Quarter Earnings

For its fourth quarter, Zillow earned 2 cents per share, or $0.5 million, on revenue of $34.3 million. This topped the analyst consensus of 0 cents per share on revenue of $31.47 million, and also represents a record 73% increase in revenues from the prior year quarter.

$26.8 million of its revenue was generated by Zillow Marketplace, and $7.5 million came from display advertisements.

Zillow’s primary rival, Trulia (NYSE: TRLA), reported similar results for its fourth quarter, with a loss of 3 cents per share on revenue of $20.6 million. Revenue grew 75% from the previous year and topped estimates, but earnings came up short of the loss of 2 cents analysts had been expecting.

For the full year, Zillow reported net income of $5.9 million - up 436% from the $1.1 million it reported in 2011. Revenue was also up 77% to $116.9 million.

“We finished the year on a resounding note, achieving record quarterly revenue, a rapid increase in mobile traffic, and strong subscriber growth,” stated CEO Pete Flint in a press release. “We are well positioned to grow in 2013 as the real estate market continues its recovery.”

Mobile Growth

Zillow reported an average of 34.5 million unique monthly visitors during the quarter. In December, over 50% of those visits originated from mobile devices, such as smartphones and tablets. Zillow stated that the figure usually surges to 60% on weekends.

By comparison, Trulia reported 23.6 million unique monthly visits, with only 24.6% coming from mobile devices. For now, Trulia has a smaller footprint in the mobile world than Zillow.

Zillow has released dedicated apps for Android, iOS and Blackberry, which take advantage of smartphone GPS technology to track real estate listings on the move.

To expand its footprint in the mobile world, Zillow also recently introduced Digs, a Pinterest-style iPad app that allows users to share interior design and remodeling ideas with each other. Digs integrates with Zillow to generate the estimated cost of each renovation. Like Pinterest, it allows users’ content to be followed, liked and shared.

In addition, Zillow recently acquired collaborative shopping platform Buyfolio, rental website HotPads and mortgage software maker Mortech. These three products were acquired to boost the strength and efficiency of Zillow’s core website. They will also make Zillow more attractive to real estate agents, who sign up for its Premier Agent service for access to premium real estate search tools.

Versus Competitors

Zillow’s primary competitors are Trulia and Move, Inc. (NASDAQ: MOVE), which owns consumer real estate websites Realtor.com, Move.com and Moving.com.

Of these three companies, Move has been around the longest, going public in 1999 prior to the dot-com crash. Move actually surged to over $400 per share before tumbling down to its current price of $10.

Zillow went public in July 2011, followed by Trulia in September 2012. That makes a direct comparison of these three peers difficult, given that Move has such a longer history than its rivals. However, we can still compare their fundamentals.

<table> <tbody> <tr> <td> </td> <td><strong>Forward P/E</strong></td> <td><strong>5-year PEG</strong></td> <td><strong>Price to Sales (ttm)</strong></td> <td><strong>Price to Book</strong></td> <td><strong>Debt to Equity</strong></td> <td><strong>Return on Equity (ttm)</strong></td> <td><strong>Profit Margin</strong></td> </tr> <tr> <td><strong>Zillow</strong></td> <td>63.85</td> <td>4.28</td> <td>13.24</td> <td>5.51</td> <td>No debt</td> <td>3.11%</td> <td>5.08%</td> </tr> <tr> <td><strong>Trulia</strong></td> <td>37.84</td> <td>1.34</td> <td>10.91</td> <td>8.58</td> <td>11.55</td> <td>-24.39%</td> <td>-16.04%</td> </tr> <tr> <td><strong>Move</strong></td> <td>13.61</td> <td>0.76</td> <td>1.94</td> <td>3.92</td> <td>No debt</td> <td>4.91%</td> <td>2.82%</td> </tr> <tr> <td><em>Best Value</em></td> <td>Move</td> <td>Move</td> <td>Move</td> <td>Move</td> <td>Zillow/Move</td> <td>Move</td> <td>Zillow</td> </tr> </tbody> </table>

Source: Yahoo Finance

On a fundamental basis, Move is the cheapest. Despite its age, Move is also ‘moving’ with the times. It also offers dedicated mobile apps for iOS, Android and Windows Phones to compete with Zillow and Trulia.

Zillow looks fundamentally healthier than Trulia, but its high forward valuation tells us that it needs to demonstrate some steep top and bottom line growth to justify its price. Unfortunately, the top and bottom line growth for all three companies is a completely mixed bag.

<table> <tbody> <tr> <td> </td> <td> <p><strong>Quarterly Revenue Growth </strong></p> <p><strong>(Y-O-Y)</strong></p> </td> <td><strong>Total Quarterly Revenue</strong></td> <td> <p><strong>Quarterly Earnings Growth </strong></p> <p><strong>(Y-O-Y)</strong></p> </td> </tr> <tr> <td><strong>Zillow</strong></td> <td>+72.60%</td> <td>$116.85 million</td> <td>-40.60%</td> </tr> <tr> <td><strong>Trulia</strong></td> <td>+75.10%</td> <td>$68.08 million</td> <td>N/A</td> </tr> <tr> <td><strong>Move</strong></td> <td>+11.60%</td> <td>$199.23 million</td> <td>-60.10%</td> </tr> </tbody> </table>

Source: Yahoo Finance

From this chart, we can see that Move is actually in some serious trouble. Although its quarterly revenue is still ahead of its peers, its growth is severely lagging. At this rate, Zillow’s total quarterly revenue will likely overtake Move’s by next year.

All three companies appear to have problems growing earnings - a classic problem that fast-growing Internet companies usually face - but Zillow’s fourth quarter earnings show that it is still capable of producing a profit - no matter how slim.

The Foolish Bottom Line

Zillow is poised in an enviable position - capitalizing on both the growth in the housing markets as well as the increased adoption of mobile technologies. The company’s robust revenue growth, growing visitor base, and widening presence on the web all make it a strong long-term investment. In the short term, however, the stock faces fundamental challenges - such as its high valuations and 5-year PEG ratio, which point to a possible slowdown next year. Still, investors should keep an eye on this stock - it could still be a long-term winner as it becomes the go-to site for housing searches in the United States.


Leo Sun 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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