by Justin Dove, Investment U Research
Wednesday, July 20, 2011
Warren Buffett recently stated that he expects the residential housing market to rebound within the next year or so.
Those sharing his optimism might find Zillow (Nasdaq: Z) an intriguing company to follow.
The Seattle-based online real estate service is scheduled to go public soon, likely with a valuation in the $500-million range.
Richard Barton and Lloyd Frink, the same team that created Expedia, co-founded Zillow in 2004. It holds an impressive database of pricing information on more than 100 million U.S. homes. A user can see an approximate value for the house at almost any U.S. address.
It also provides listings of houses for sale or rent. It displays consumer-generated ratings and reviews of real estate agents. It offers subscription services for professional real estate agents and even mortgage services.
Profits Are Zero for Zillow
But there’s a problem. Zillow hasn’t generated a profit at this point. Instead, it’s racked up almost $80 million in debt in seven years. The housing market is shrinking, not expanding, and it’s likely hampering growth for Zillow.
Zillow failed to successfully monetize itself over the last seven years, but it might be close to doing so. As with other technology IPOs, investors are buying an idea and hoping it takes off. Zillow is a great idea, but it’ll take more than ideas to make it a profitable enterprise. There’s also likely to be an initial inflation in the stock judging by the recent trend of technology IPOs such as Pandora Media (NYSE: P) and LinkedIn (NYSE: LNKD).
Zillow’s Possibilities for Future Growth
There are a few signs that point to future profitability for Zillow:
- Revenue through the first quarter of 2011 (11.3 million) was more than double the same quarter in 2010 (5.3 million). The company held its losses under one million in the quarter, compared to $2.8 million in the same quarter of 2010.
- This rapid growth in 2011 could be attributed to the strategic partnership Zillow made with Yahoo! (Nasdaq: YHOO) in February of 2011. Zillow provides Yahoo! with real estate listings and in exchange gets exclusive advertising rights on the Yahoo! Real Estate site. Average unique monthly visitors to Zillow’s website increased by 86 percent in the first quarter of 2011 over first quarter 2010. Unique traffic increased 36 percent in the first quarter of 2011 over the last quarter of 2010. And there was a 32-percent increase in agent subscriptions.
Zillow is the largest, most comprehensive and most accessible real estate database in the United States. It seems to be growing steadily and picking up steam. Funds generated from the IPO could be used to increase the website’s exposure or to expand its range of services.
Use the Housing Market As a Signal
Any early indicators of an improved housing market will mean more people looking for homes, which will create more business for agents. Potential buyers and agents can use Zillow’s extensive database to browse property values and connect with each other. It’s a very convenient tool.
That being said, it’s likely overpriced at $16 to $18 per share, and will be even more inflated after it pops on IPO. Give some time for the buzz to dissipate and the housing market to improve. After the inflationary hype dies down, consider taking a closer look at Zillow.
Good Investing,
Justin Dove
Any investment contains risk. Please see our disclaimer.
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Revenue through the first quarter of 2011 (11.3 million) was more than double the same quarter in 2010 (5.3 million). The company held its losses under one million in the quarter, compared to $2.8 million in the same quarter of 2010.
showing big different
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