Description

Move Inc has 50%+ upside from today’s price.  The company will get a cyclical lift from the recovery in existing home sales, a secular lift from real estate agents shifting marketing spend online, and a company specific tailwind of a new product (Co Broke) that is growing like a weed.  All this with a net cash balance sheet, a $1.2B NOL, and while trading at a laughable discount to its two publicly traded comps, Z and TRLA (despite being a better, albeit slower growing, asset in my opinion).

Move was written up in April 2012 by bank999, it is excellent work and rather than redo all the background here I am going to point you to that along with birdie11’s Zillow write up for industry structure, etc. 

Thesis Summary

• Move’s legacy product Showcase has been cyclically depressed, it has recently turned the corner and should easily grow 5-6% per year from here with 60-80% incremental margins
• The company’s new product Co Broke has been very successful and should grow from $11M in revenue in 2012 to $50m+ over the next few years (total company revenue in 2012 was $200m)
• The business is generally misunderstood by the sell side and most investors we have spoken with, everyone bashes Move for issues that have already been resolved (namely the NAR contract which will be discussed below)
• Move trades at 10x cash earnings and 1.6x EV/SALES versus Z/TRLA which command 40x and 7.5x, respectively

Legacy Move and it’s exposure to the housing market

Move generates 75% of its revenue from realtor.com, the vast majority of this is from a product called “Showcase” which allows the seller’s listing agent to enhance their listing for roughly $26/ad/month, Move sells to roughly 400k agents on a 12 month subscription basis.  Enhanced listings allow an agent to showcase their brokerage and contact information on the listing page along with the listing itself getting priority when the consumer is browsing in that particular ZIP code.  Typically they are able to monetize 50% of their listing inventory through Showcase.  This has been Move’s legacy bread and butter. 

The problem with this segment has been that its health is tied to listing creation, which is tied to the strength of the existing home sales market, which hasn’t picked up yet in a meaningful way. Active listings in the US have gone from approx. 3m to their current 2m.  I believe they will improve as used home pricing ticks up and homeowners sitting on a bad mark on their house decide to sell.  Its easy to place Move in the “turd” category when looking at its trailing growth rates and comparing it to Z/TRLA/PHM/LEN, etc, but growth has turned the corner (Q2 12) and at this valuation they don’t exactly have to shoot the lights out, I’m looking for growth rates of 4-6% from here.  In addition, pricing has been stagnant for 5 years and the CEO thinks a MSD pricing bump would be very easy to implement.

The new product: Co Broke

Quick history lesson: Move has a perpetual agreement with the National Association of Realtors (NAR) for realtor.com to be their official site, they also have a board seat, in the past Move had been constrained in the ways in which it could monetize the ads on realtor.com in exchange for direct access to MLS as a source for their listings (more on this later).  When Steve Berkowitz came on board as CEO he renegotiated the contract to give Move greater autonomy with the site.  This point is important and seems misunderstood by the industry, including the management teams of the competition.

 As mentioned above legacy Move has focused solely on the selling agent and have ignored the buyer’s side of the table.  Enter Co Broke.  Co Broke is the same product as Z/TRLA core offerings, giving potential buyer’s agents advertising preference on listings bundled by the ZIP code.  The way it works is when the consumer is interested in a listing and clicks through to “learn more” they are given the agent’s contact information.  This model is a helluva lot more juicy than the legacy product simply because the pricing is based on auction rates and you can sell a single ZIP code to numerous agents.  Zillow claims a 700% ROI, I think thats way too high, but even at 100-200% it’s a way better spend than newspaper/TV/etc, so I believe ARPU has of room to run here.

As of Q1 2012 Co Broke revenue/subscribers were zero.  In Q4 they will have approx 8k subs and be on a $5M/qtr revenue run rate with an ARPU of roughly of $150/agent/month.   Z/TRLA each have roughly 24-36K paying subs, I believe MOVE can get to at least those levels by the end of 2014.  So with no ARPU inflation (pretty conservative) this can be a $42M business in 2014 up from $11M in 2012.

Revenue split, model, and capitalization

Showcase                                                                                                                            42%

Co Broke                                                                                                                              5%

Other realtor.com (mostly Featured Product which                                                              27%

shows listings at the top of the search screen)

TopProducer (agent CRM offering)                                                                                       15%

Other                                                                                                                                    11%

A few other quick points:

                -FCF = EBITDA - $10m of capex ($1.2B NOL)

                -incremental margins from here are big, 60-80%

                -management looks for 20% EBITDA margins once they hit a $240M revenue run rate

MOVE vs TRLA/Z

Historically the major difference has been simple, MOVE caters to agents on the sell side of the transaction and Z/TRLA cater to agents on the buy side.  As mentioned above all this has now changed with the introduction of Co Broke.  When investors catch on to the fact that Co Broke = Z/TRLA the valuation discrepancy will be hard to ignore.

It is important to understand how the players source their listings.  Typically an agent initiates a listing and pays a Multiple Listing Service (MLS) to place it in their database.  There are roughly 850 MLSs in the US and most are owned by local NAR associations of various sizes.  The purpose of these entities is to disseminate the listings effectively and provide a structure for compensation (ie—make sure the agent doesn’t get screwed).  The only way to get timely listing information is through an MLS, everything else recycled and typically out of date which makes the consumer experience frustrating (clicking through to homes that are no longer on the market is annoying).  All this is important because, due to it’s relationship with the NAR, MOVE has a relationship with all 850 MLSs, Z/TRLA have very few.  In fact, Z/TRLA source between 40-50% of their listings from MOVE’s Listhub product.  This plays a large factor in MOVE’s superior page view and minutes spent per visit statistics, they simply have better content and as shown below site visitors agree.

                                                Unique Visitors (Ms)                     Page Views (M’s)            Minutes Spent per Visit                                

                   MOVE                                   20+                                                         403                                         9.6

                  Z                                            36                                                           257                                         5.2

                  TRLA                                      24.9                                                        270                                         7.6

Why the opportunity exists

-looking at Move’s historical growth is very uninspiring, but for the reasons mentioned above I believe this is about to change, Q4 2012 with be the first qtr of double digit revenue growth since 2006

-none of the sell side analysts that cover Z/TRLA want to acknowledge its existence because the valuation looks so terrible next to their darlings, after a few solid qtrs they may want to steer investors towards the ugly duckling—a great example would be Telsey’s initiation on the group this week, the analyst got Move’s market cap wrong by $100m in the report and when I spoke with him he admitted he never looked into the company or spoke with management

-Move’s largest shareholder, Nierenberg Investment Management, is seemingly exiting.  I know nothing about them but they seem to run a concentrated small/micro cap book.  Anyways, they put up a 1.8M share block back in November, and if you are looking for stock JPM has blocks of 100k all day long from a “front page holder”.

-Move went public in 1999 and management was thrown in jail for fraud, so it has some legacy stink on it

Valuation and Price Target

As shown above MOVE is cheap on every metric versus it’s two public peers.  The business will never grow as quickly or trade at the same multiple.  But as explained above I do believe it is a superior asset and would be much more likely to be taken private (rumors of GOOG for Z are swirling...).  MOVE should trade at 15x 2014 cash eps, or roughly $14.  I think this will prove to be conservative.

Catalyst