Will Zillow Become the Next $10 Billion Online Company?

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

As investors ponder whether Zillow (NASDAQ: Z) is overvalued at $70, the big picture needs to be considered. The company has a market value of nearly $2.5 billion and revenue that won’t even cross $200 million this year. While it might be difficult to envision it being worth $10 billion at this point, the company appears to have all the makings of a future that big.

The company operates the leading real estate and home-related marketplace with products that help people find vital information about homes and connect them with the best professionals in the field.

The online sector has precedents with Facebook and LinkedIn (NYSE: LNKD) currently at values in excess of $20 billion and a fellow online site TripAdvisor recently surpassing the $10 billion valuation. In addition, several others including Groupon and Zynga reached that valuation before faltering. Heck, even private Twitter is listed with a value of around $10 billion now. With rebounding home sales and Zillow leading the online information for real estate sales, what will keep it from not only reaching but also eventually surpassing $10 billion?

Growth prospects

Unlike Yelp, most people universally agree that Zillow provides a useful service that local real estate agents and services really want to advertise on. The company, though, faces a competitive environment, as Trulia (NYSE: TRLA) has become a major threat even as Zillow became the sector leader years ago. In fact, most investors are probably surprised that Zillow is worth much less than the likes of TripAdvisor or Yelp.

The revenue numbers are actually a lot smaller than most would expect, with Q2 slated to only reach $44 million and the full year to hit $183 million. The growth rate of nearly 57% is spectacular, but the expectations have to be for the online leader in the vast real estate market to be significantly larger.

More importantly, analysts finally expect Zillow to be in the black next year with earnings surging to $0.54, though those estimates have declined from $0.83 over the last 90 days. If that can occur on a revenue base of around $250 million next year, the profits should surge by the time revenue hits $1 billion in several years.

The potential exists for a surging market as home sales pick up to more normal levels following the real estate collapse. Trulia could impact that growth, as the second leading website expects to hit revenue of $111 million in 2013 while also being profitable. At some point, real estate agents and homebuyers will prefer only one site, and Zillow could squeeze out more growth by taking market share.

LinkedIn example

LinkedIn provides one of the better examples of where Zillow could end up regarding valuation if it continues to be the top real estate online destination. The online professional network firm reached under $1 billion in revenue for 2012, and the stock has soared to be worth $23 billion. Even at the much higher revenue base, the company is still growing 54% and trades at nearly 15 times current year revenue expectations. That actually places LinkedIn at a higher multiple than the much smaller Zillow.

This example also highlights how Zillow could reach an inflection point to where revenue growth accelerates as more users jump on board and advertisers flock to the service

HomeAway and Trulia consolidation

Investors probably don’t need to look much farther than other startups in the sector to see the ability to consolidate the market. While Trulia competes more head to head with Zillow to provide tools to research homes for sale, HomeAway (NASDAQ: AWAY) provides information on vacation rentals as an ancillary business.

These two stocks have a market value of around $3.6 billion and revenue approaching $450 million this year. In fact, HomeAway has a revenue base around double that of Zillow with expectations of hitting nearly $90 million in quarterly revenue in this quarter. Also, HomeAway has been solidly profitable for a few years with expectations for further growth.

Trulia is the smallest and fastest growing of the trio with revenue appreciating around 65% over 2012 levels. Analysts expect earnings to surge to $0.71 next year, but the stock trades at roughly 50 times those estimates so it doesn’t offer much value at this level.

Combined the trio is valued around $6 billion so naturally some consolidation in the sector and a developing leader could grab huge revenue without the market growing just by becoming the default website for all real estate needs.

Bottom line

Anybody that has used Zillow to locate a new property or estimate the value of a house realizes the power of the online service. When comparing it to public examples such as LinkedIn or TripAdvisor one quickly sees where the $10 billion valuation is not only plausible, but could come quicker than most think.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends HomeAway, LinkedIn, and Zillow. The Motley Fool owns shares of HomeAway, LinkedIn, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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