This Stock Hit the Market, and It's Getting Crowded
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Quick! Name a recent dotcom IPO that was wildly oversubscribed, that skyrocketed its first day of trading, and that started to fizzle out shortly thereafter. Here's a hint: it rhymes with Julia. Did you guess Trulia (NYSE: TRLA)? If so, are you a real estate agent or were you recently shopping for a residential property?
Founded by two physicists, Trulia is changing the way we buy and sell residential real estate. It's helping us get to know our local markets better by providing us with pictures of recently sold properties and bringing one of the most significant pillars of our economy into the Internet age. But it's not alone.
The Online Real Estate Ecosystem
Today's crop of Internet real estate businesses can be sorted into three categories: 1. online real estate marketplaces, 2. service providers for real estate agents, and 3. discount real estate brokerage. Trulia falls squarely into the first category. The second includes Market Leader, which operates the ActiveRain social media site and JustListed.com lead generation site, among several, for real estate professionals. Lastly, the third is defined by privately held Redfin, which has drawn plenty of attention for its unconventional business model and highly sophisticated website.
By aggregate market capitalization, Trulia and its ilk, which I'll collectively refer to as the marketplaces, have achieved the greatest level of success. The big fish in this pond is not Trulia, though. It's Zillow (NASDAQ: Z). Trulia and Move, Inc.'s (NASDAQ: MOVE) REALTOR.com are dueling for a distant second place position.
Trulia's and Zillow's eponymous sites are hard to distinguish. Free to the consumer, they display properties for sale and for rent as well as those that have sold recently, both with pictures and descriptions in most cases. They also offer forums that connect homebuyers to each other and to real estate professionals and provide estimates of individual home values, known as Trulia Estimates and Zestimates respectively. Zestimates made Zillow famous during the real estate boom of the 2000s, whereas Trulia Estimates are so new that Zillow's patent infringement lawsuit over them is still pending.
REALTOR.com is in the same game as Trulia and Zillow, but it doesn't always provide previous sale prices, tax assessments, and proprietary estimates of property value for its listings. Nor does it emphasize map-based searching as heavily. Its parent company isn't as young as Trulia or Zillow either. Formerly known as Homestore, Inc. and founded in 1993, Move, Inc. is ancient by Silicon Valley standards and is a vestige of the last tech bubble. Its key advantage is the strong awareness of the REALTOR brand, the outcome of years of lobbying and marketing by the National Association of REALTORS, which helps establish an instant rapport with local real estate firms and consumers alike. Other than that, this firm strikes me as a has-been of the Web 1.0 era, merely taking the concept of the traditional real estate book to the Web rather than turning the process of finding a new home on its head.
If Everything's Free, How Do These Companies Make Money?
Trulia, Zillow, and Move provide heaps of useful information free of charge to the consumer to draw traffic, but like most other Internet companies, their business models are driven by advertising. Agents pay various fees to list properties on REALTOR.com depending on how many pictures they wish to submit and whether they want their listings to appear in prominent positions among the search results. On Trulia and Zillow, however, a basic listing is free. Fees are only charged for featured listings and for designation as a premier agent, the latter of which includes advertisements placed alongside rival agents' listings and generates leads.
What Makes Trulia Special?
Not much. Trulia's search menu has a few more options than Zillow's or Move's, allowing you to sort results by date of price reduction and by foreclosure status, for example. For what it's worth, the Trulia Voices forum for my market is busier than the Zillow Real Estate Advice forum.
The Bottom Line
Trulia has an excellent product, but without sufficient advertising revenue, this product alone will not deliver superior returns to investors (also known as alpha). To deliver meaningful results, Trulia and its rivals must develop the market for online real estate analytics and consider diversifying into commercial and industrial real estate, two markets that remain opaque. Should they continue focusing solely on the residential side of the market, they may find that there isn't enough money to sustain them all. Keep in mind that Google gave up on real estate search in early 2011, which it had hoped to integrate with its Google Maps service.
As an advocate for transparent, efficient markets, which the real estate market is not, I'm rooting for Trulia, Zillow, and Move, but as an investor, I'm going to stay away for now. Unless you believe that one of the real estate marketplaces will be a Google takeover target, as some observers have since 2009, I'd only consider buying Trulia or Zillow (and not Move) if their fundamentals improve.
Fool blogger Jonathan Lim has no positions in the stocks mentioned above. The Motley Fool owns shares of Zillow. Motley Fool newsletter services recommend 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.