ZILLOW INC Z S
August 09, 2013 - 10:29am EST by
mm202
2013 2014
Price: 89.50 EPS -$0.04 $0.57
Shares Out. (in M): 35 P/E 0.0x 157.0x
Market Cap (in $M): 3,093 P/FCF 0.0x 0.0x
Net Debt (in $M): -144 EBIT 0 0
TEV ($): 2,949 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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  • Real Estate
  • Online Advertising
  • Misunderstood Business Model
  • Insider selling
  • Rollup
  • Poor Investor Communication

Description

As a follow-up to an insightful yet ill-timed short write-up by Birdie11 last November, I am presenting Z as a timely and compelling short. I recommend Birdie11’s write-up for a comprehensive background on Z’s business, which I will not recreate here.

 

Not only is Z an extraordinarily expensive stock, but I believe that it has been awarded a valuation generally reserved for only truly disruptive and dominant companies, when in fact it is very far from that sort of company and has a business model that has never proven effective for either Z or its competitors.

 

Since this is valueinvestorsclub, I’ll start with discussing Z’s nosebleed valuation, though I don’t think even the company’s most ardent supporters would argue the point that Z is extremely expensive.

 

The average 2014 earnings estimate for the company currently stands at .59.  Z therefore trades at approximately160 times this forward estimate.  The consensus analyst estimate for the company’s 2014 revenues is $259 million. With a current market cap of 3.07 billion, Z trades at about 12 times those projected 2014 sales.

 

I’m not going to belabor the point- this is obviously an extremely expensive stock by any measure. I would contend that, even if Z were a truly superlative company with extraordinary growth potential over the next several years and monopolistic control over its market niche, buying the stock at that sort of valuation would be a very poor risk/reward proposition. However, Z is very, very far from such a company as the remainder of this write-up will address.

 

It seems fairly clear that the massive year over year rebound in the housing market has had a lot to do with Z’s meteoric price rise in that timespan. Z seems to be perceived as a high-tech way to play the housing rebound, with the ability to scale its business impressively over time while keeping expenses low and margins high that some other market darling internet stocks possess.

 

The reality, however, is very different.

 

To understand why, you have to understand Z’s business model.  But before we get into that, let’s take a step back and consider that companies have been generating internet leads for realtors for more than 15 years. Keep in mind that MOVE.com (formerly Homestore.com), a company with essentially the same business model as Z, couldn’t operate profitably in the real estate boom of the mid 2000's. Even though MOVE was the sole online destination for brokers to buy leads MOVE’s stock was decimated, with MOVE going from over a 2 billion dollar company to a 540 million dollar company today.  Similarly SOLD (now LEDR), which also operates essentially the same business as Z, lost approximately 80% of its market capitalization from peak to trough. The decimation of MOVE and SOLD’s stock prices occurred as investors realized that the business model of selling leads to real estate brokers is extremely difficult to scale. It remains so today, only even moreso due to the presence of multiple competitors.  

 

Speaking of competitors, MOVE currently trades for about twice projected 2014 sales..roughly 1/6th the price/sales ratio of Z.   LEDR trades for about 4.5 time projected 2014 sales. Even upstart TRLA, which by any measure is an extremely overpriced stock in its own right, trades at “only” 9.5 times projected 2014 sales and a tremendously lower forward PE relative Z at “only” 60 times projected 2014 earnings of .74 (which compares favorably to estimates for Z to make .54 per share, even though Z has more than twice TRLA’s market cap).

 

 

Now to Z’s business model- almost all of their revenues are derived from realtors who subscribe to their service so that Z will give them leads. In order for Z to deliver those leads- and keep realtors as paying customers- they have to drive customers to their site. Now the company has been doing a good job of increasing its pageviews. BUT they have been spending a ton of money on advertising to do it, and the company has admitted that the number of leads they are generating for their broker customers has essentially remained unchanged.  The upshot of these disturbing trends can be clearly seen in their last earnings report, in which they reported dramatically decreased margins (Ebitda margins plummeted from 19% in the second quarter of 2012 to 11% in the just-released Q2 2013 report) and resultingly reported a much greater than anticipated loss (despite beating on revenues). Following the report, the stock sold off sharply and imho this was a very rational reaction as I believe that this report will be seen in retrospect as the “beginning of the end” for Z…as the point at which it started to become obvious that Z operates a very low margin business.  On the post earnings conference call Z’s CEO admitted that subscribers were still getting the same 10-20 leads per month despite Z spending so much on advertising to drive pageviews.  This explains why margins dropped so much, and it also explained why Z has indicated that it wants to focus on expanding into the rental space. As with Z’s acquisition binge (discussed later) this focus on rental business is another “tell” that the company knows that its existing business is a very difficult one, with very low margins. Of course, the rental space is also very crowded and includes numerous regional competitors as well as free competitors like craigslist.

 

Not only is the company is paying through the nose to drive additional customer volume to their site but, as Birdie11 set forth compellingly in his write-up, it also appears very likely that the low  hanging fruit has already been picked in terms of Z signing up paying realtor customers. Z is not a new company. It has in fact been around for roughly 7 years and has never made a full year profit, nor been cash flow positive in any year (in most years it hasn’t even come close). Realtors are well aware of the service Z provides and I see no reason to suspect that there is any realistic chance of Z becoming suddenly immensely popular with realtors when they are offering the same service they’ve been offering with unimpressive results for 7 years. Not only is Z’s business essentially the same as it always has been, but competition in Z’s niche has significantly intensified recently, as Birdie11 pointed out in his write-up (competitors include TRLA, MOVE, realtor.com, LEDR). Z’s business has very low barriers to entry and there is very little to distinguish Z’s site from that of its competitors. Even worse, there has been substantial realtor backlash against Z’s “zestimates” of home price values, which from all accounts tend to be largely inaccurate (reportedly, 17% of Zestimates are more than 24% incorrect). 

 

Acquisition binge

 

It should be noted that Z has been on an acquisition binge as of late, acquiring Rentjuice, Mortech and Hotpads. These acquisitions have contributed significantly to Z’s revenue growth but imho they represent an acknowledgment that Z’s core business does NOT have impressive long term growth prospects, for the reasons detailed above.  The same can be said for the prodigious amount of recent selling by company insiders.

 

Insider selling

 

Z insiders have sold roughly $120 million of stock in the last year, which represents yet another red flag. My view is that Z insiders realize that the company’s prospects are nowhere near as bright as the recent stock performance would suggest, and are therefore happy to cash out at current nosebleed levels.

 

I've certainly seen companies with even more insider selling. However, Z has demonstrated a concerning disregard for shareholders in at least one of their prior offerings. The best example of this comes from their offering in September of last year. In their August conference call they essentially said that they were filing a shelf just as a matter of "good housekeeping" (see management's comments below, taken verbatim from the quarterly conference call), strongly suggesting no immediate plans to raise money. And then the company sold shares to the public pursuant to the shelf as soon as it became effective, with insiders cashing out $22 million as part of that offering. This raises a red flag in my view as to Z management's transparency and regard for its investors (as does the  lack of disclosure regarding churn which is addressed below).

 

Chadd M. Cohen CFO:

"On August 1, we became S-3 eligible and today filed the shelf with the SEC as

a matter of good housekeeping and to provide ourselves with flexibility on

our capital structure in order to remain prepared for future considerations of

both our operational needs and potential strategic opportunities in the

marketplace."

Spencer Rasckoff, CEO:

" So basically…a year after being public, as a matter   we filed the shelf, which is pretty much customary for

companies at this stage… So, just to be clear for those on the call who maybe

don't know that there's been a shelf and a follow-on, what we filed today is not

a follow-on offering… It’s a shelf statement with the SEC, which says, basically

it registers shares… So if we decide to do a follow-on later, then the shares

can be sold more rapidly; basically we can complete a follow-on more

expeditiously… you're supposed to file what you think is reasonable to sell

over a two year period potentially, and so that explains why we chose $150

million… Again, it’s a pretty customary thing for a company on the one year

anniversary post IPO to do this just so you can do a follow-on, if you choose,

and we have not decided whether or not to do a follow-on, if you choose, more

expeditiously, and we have not decided whether or not to do a follow-on."

 

 

 

 

Refusal to disclose churn rate

 

The SEC last year called on Z to disclose the churn rate of its customers, something that it has yet to do. I believe that it likely refuses to do so because the churn rate, if revealed, would paint an unflattering picture for the company. As birdie11 detailed in his write-up, there is significant anecdotal evidence of Z alienating its realtor customers by, among other things, (1) providing often egregiously inaccurate “zestimates” of home values which makes realtors’ jobs harder, and (2) by sharing their leads with numerous realtors in the same territory (thereby reducing their value to each paying realtor). Complaints such as the one relayed by the realtor quoted below are apparently common, and therefore it seems reasonable to assume that Z’s conveniently undisclosed churn rate is likely troublingly high:

 

“I have used Zillow for my marketing with 3 zipcodes. I have slowly cancelled all but one zip codes. I have had a closed transaction.So It kinda worked. That said there is no consistency in leads and quality of leads. I used to have a larger market share for each territory. My exposure is being diluted by the increase in volume to the site. Zillow sells more advertising to more agents in my area. So Its kind dilutive unless you pay more for advertising. I suspect other realtors are feeling the same pinch and while I suspect this will work for zillow in the short term. I am not confident about the long term. If this continues. I will discontinue my marketing at Zillow. As there are other sources at better pricing.
Be happy to explain in more details if needed. I suspect having a valuation of 10-15 times sales if lofty. I suspect there churn rates will start to go up in near future. Just my inside view.

http://bit.ly/17wyx9S

 

Overly optimistic growth projections

 

Analyst estimates expect a 38% revenue increase for Z from 2013 to 2014.  While I believe that Z would be egregiously priced even if these robust growth projections were to be met, I believe that there is a very high likelihood that they won’t be, with disastrous consequences for Z’s stock price.  Leaving aside how competitive the space is and the large number of anecdotal reports re unhappy Z realtor-customers, there are additional reasons to view these growth projections suspiciously.  Once again, keep in mind that this company has been operating since 2006 and has been cold calling virtually every active realtor monthly for years. So almost all realtors are well aware of the service they offer, which begs the question- if a realtor hasn’t already subscribed, what’s going to make them start now?  Particularly with competition dramatically increased and when the company admits that the quality of the leads they provide has remained essentially the same despite their increased advertising efforts.

 

MOVE was the market leader up until a few years ago, but lost that position due in large part to the lack of complete listing information. High foreclosure rates that were in evidence following the housing crash very likely drove significant additional traffic to Zillow’s and Trulia’s sites, as these sites included listings for properties that competitor MOVE did not list. Because of an agreement with the National Association of Realtors., MOVE was not able to list a myriad of properties that included foreclosures and other non-realtor listed homes and apartments.  Two weeks ago that changed as the NAR in a special board meeting agreed to lift the restrictions on what MOVE could list to better able the site to compete with Zillow and Trulia.  Basically, realtors decided they’d had enough.  By the way, this is the first special board meeting by the NRA since 1996.  Clearly they saw that they had a problem with Zillow, Trulia, Redfin, etc. and decided they need to do something about it.  The NAR in a statement said they were committed to “making realtor.com® the first, best online destination for home buyers and sellers.”

 

In addition, while housing prices are still rising significantly, it appears likely that the pace of new home sales has begun to moderate and will not maintain the furious pace that it has been seen in the last year as the housing market emerged from crisis and caught fire. June saw a drop in existing home sales as mortgage rates rose.  This also could contribute to Z missing wall street revenue estimates.

 

 

 

 

 

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1). Continued margin erosion and/or disappointing revenue growth causes wall street to wake up and see that Z’s massive valuation multiple is completely unjustified.
    sort by    

    Description

    As a follow-up to an insightful yet ill-timed short write-up by Birdie11 last November, I am presenting Z as a timely and compelling short. I recommend Birdie11’s write-up for a comprehensive background on Z’s business, which I will not recreate here.

     

    Not only is Z an extraordinarily expensive stock, but I believe that it has been awarded a valuation generally reserved for only truly disruptive and dominant companies, when in fact it is very far from that sort of company and has a business model that has never proven effective for either Z or its competitors.

     

    Since this is valueinvestorsclub, I’ll start with discussing Z’s nosebleed valuation, though I don’t think even the company’s most ardent supporters would argue the point that Z is extremely expensive.

     

    The average 2014 earnings estimate for the company currently stands at .59.  Z therefore trades at approximately160 times this forward estimate.  The consensus analyst estimate for the company’s 2014 revenues is $259 million. With a current market cap of 3.07 billion, Z trades at about 12 times those projected 2014 sales.

     

    I’m not going to belabor the point- this is obviously an extremely expensive stock by any measure. I would contend that, even if Z were a truly superlative company with extraordinary growth potential over the next several years and monopolistic control over its market niche, buying the stock at that sort of valuation would be a very poor risk/reward proposition. However, Z is very, very far from such a company as the remainder of this write-up will address.

     

    It seems fairly clear that the massive year over year rebound in the housing market has had a lot to do with Z’s meteoric price rise in that timespan. Z seems to be perceived as a high-tech way to play the housing rebound, with the ability to scale its business impressively over time while keeping expenses low and margins high that some other market darling internet stocks possess.

     

    The reality, however, is very different.

     

    To understand why, you have to understand Z’s business model.  But before we get into that, let’s take a step back and consider that companies have been generating internet leads for realtors for more than 15 years. Keep in mind that MOVE.com (formerly Homestore.com), a company with essentially the same business model as Z, couldn’t operate profitably in the real estate boom of the mid 2000's. Even though MOVE was the sole online destination for brokers to buy leads MOVE’s stock was decimated, with MOVE going from over a 2 billion dollar company to a 540 million dollar company today.  Similarly SOLD (now LEDR), which also operates essentially the same business as Z, lost approximately 80% of its market capitalization from peak to trough. The decimation of MOVE and SOLD’s stock prices occurred as investors realized that the business model of selling leads to real estate brokers is extremely difficult to scale. It remains so today, only even moreso due to the presence of multiple competitors.  

     

    Speaking of competitors, MOVE currently trades for about twice projected 2014 sales..roughly 1/6th the price/sales ratio of Z.   LEDR trades for about 4.5 time projected 2014 sales. Even upstart TRLA, which by any measure is an extremely overpriced stock in its own right, trades at “only” 9.5 times projected 2014 sales and a tremendously lower forward PE relative Z at “only” 60 times projected 2014 earnings of .74 (which compares favorably to estimates for Z to make .54 per share, even though Z has more than twice TRLA’s market cap).

     

     

    Now to Z’s business model- almost all of their revenues are derived from realtors who subscribe to their service so that Z will give them leads. In order for Z to deliver those leads- and keep realtors as paying customers- they have to drive customers to their site. Now the company has been doing a good job of increasing its pageviews. BUT they have been spending a ton of money on advertising to do it, and the company has admitted that the number of leads they are generating for their broker customers has essentially remained unchanged.  The upshot of these disturbing trends can be clearly seen in their last earnings report, in which they reported dramatically decreased margins (Ebitda margins plummeted from 19% in the second quarter of 2012 to 11% in the just-released Q2 2013 report) and resultingly reported a much greater than anticipated loss (despite beating on revenues). Following the report, the stock sold off sharply and imho this was a very rational reaction as I believe that this report will be seen in retrospect as the “beginning of the end” for Z…as the point at which it started to become obvious that Z operates a very low margin business.  On the post earnings conference call Z’s CEO admitted that subscribers were still getting the same 10-20 leads per month despite Z spending so much on advertising to drive pageviews.  This explains why margins dropped so much, and it also explained why Z has indicated that it wants to focus on expanding into the rental space. As with Z’s acquisition binge (discussed later) this focus on rental business is another “tell” that the company knows that its existing business is a very difficult one, with very low margins. Of course, the rental space is also very crowded and includes numerous regional competitors as well as free competitors like craigslist.

     

    Not only is the company is paying through the nose to drive additional customer volume to their site but, as Birdie11 set forth compellingly in his write-up, it also appears very likely that the low  hanging fruit has already been picked in terms of Z signing up paying realtor customers. Z is not a new company. It has in fact been around for roughly 7 years and has never made a full year profit, nor been cash flow positive in any year (in most years it hasn’t even come close). Realtors are well aware of the service Z provides and I see no reason to suspect that there is any realistic chance of Z becoming suddenly immensely popular with realtors when they are offering the same service they’ve been offering with unimpressive results for 7 years. Not only is Z’s business essentially the same as it always has been, but competition in Z’s niche has significantly intensified recently, as Birdie11 pointed out in his write-up (competitors include TRLA, MOVE, realtor.com, LEDR). Z’s business has very low barriers to entry and there is very little to distinguish Z’s site from that of its competitors. Even worse, there has been substantial realtor backlash against Z’s “zestimates” of home price values, which from all accounts tend to be largely inaccurate (reportedly, 17% of Zestimates are more than 24% incorrect). 

     

    Acquisition binge

     

    It should be noted that Z has been on an acquisition binge as of late, acquiring Rentjuice, Mortech and Hotpads. These acquisitions have contributed significantly to Z’s revenue growth but imho they represent an acknowledgment that Z’s core business does NOT have impressive long term growth prospects, for the reasons detailed above.  The same can be said for the prodigious amount of recent selling by company insiders.

     

    Insider selling

     

    Z insiders have sold roughly $120 million of stock in the last year, which represents yet another red flag. My view is that Z insiders realize that the company’s prospects are nowhere near as bright as the recent stock performance would suggest, and are therefore happy to cash out at current nosebleed levels.

     

    I've certainly seen companies with even more insider selling. However, Z has demonstrated a concerning disregard for shareholders in at least one of their prior offerings. The best example of this comes from their offering in September of last year. In their August conference call they essentially said that they were filing a shelf just as a matter of "good housekeeping" (see management's comments below, taken verbatim from the quarterly conference call), strongly suggesting no immediate plans to raise money. And then the company sold shares to the public pursuant to the shelf as soon as it became effective, with insiders cashing out $22 million as part of that offering. This raises a red flag in my view as to Z management's transparency and regard for its investors (as does the  lack of disclosure regarding churn which is addressed below).

     

    Chadd M. Cohen CFO:

    "On August 1, we became S-3 eligible and today filed the shelf with the SEC as

    a matter of good housekeeping and to provide ourselves with flexibility on

    our capital structure in order to remain prepared for future considerations of

    both our operational needs and potential strategic opportunities in the

    marketplace."

    Spencer Rasckoff, CEO:

    " So basically…a year after being public, as a matter   we filed the shelf, which is pretty much customary for

    companies at this stage… So, just to be clear for those on the call who maybe

    don't know that there's been a shelf and a follow-on, what we filed today is not

    a follow-on offering… It’s a shelf statement with the SEC, which says, basically

    it registers shares… So if we decide to do a follow-on later, then the shares

    can be sold more rapidly; basically we can complete a follow-on more

    expeditiously… you're supposed to file what you think is reasonable to sell

    over a two year period potentially, and so that explains why we chose $150

    million… Again, it’s a pretty customary thing for a company on the one year

    anniversary post IPO to do this just so you can do a follow-on, if you choose,

    and we have not decided whether or not to do a follow-on, if you choose, more

    expeditiously, and we have not decided whether or not to do a follow-on."

     

     

     

     

    Refusal to disclose churn rate

     

    The SEC last year called on Z to disclose the churn rate of its customers, something that it has yet to do. I believe that it likely refuses to do so because the churn rate, if revealed, would paint an unflattering picture for the company. As birdie11 detailed in his write-up, there is significant anecdotal evidence of Z alienating its realtor customers by, among other things, (1) providing often egregiously inaccurate “zestimates” of home values which makes realtors’ jobs harder, and (2) by sharing their leads with numerous realtors in the same territory (thereby reducing their value to each paying realtor). Complaints such as the one relayed by the realtor quoted below are apparently common, and therefore it seems reasonable to assume that Z’s conveniently undisclosed churn rate is likely troublingly high:

     

    “I have used Zillow for my marketing with 3 zipcodes. I have slowly cancelled all but one zip codes. I have had a closed transaction.So It kinda worked. That said there is no consistency in leads and quality of leads. I used to have a larger market share for each territory. My exposure is being diluted by the increase in volume to the site. Zillow sells more advertising to more agents in my area. So Its kind dilutive unless you pay more for advertising. I suspect other realtors are feeling the same pinch and while I suspect this will work for zillow in the short term. I am not confident about the long term. If this continues. I will discontinue my marketing at Zillow. As there are other sources at better pricing.
    Be happy to explain in more details if needed. I suspect having a valuation of 10-15 times sales if lofty. I suspect there churn rates will start to go up in near future. Just my inside view.

    http://bit.ly/17wyx9S

     

    Overly optimistic growth projections

     

    Analyst estimates expect a 38% revenue increase for Z from 2013 to 2014.  While I believe that Z would be egregiously priced even if these robust growth projections were to be met, I believe that there is a very high likelihood that they won’t be, with disastrous consequences for Z’s stock price.  Leaving aside how competitive the space is and the large number of anecdotal reports re unhappy Z realtor-customers, there are additional reasons to view these growth projections suspiciously.  Once again, keep in mind that this company has been operating since 2006 and has been cold calling virtually every active realtor monthly for years. So almost all realtors are well aware of the service they offer, which begs the question- if a realtor hasn’t already subscribed, what’s going to make them start now?  Particularly with competition dramatically increased and when the company admits that the quality of the leads they provide has remained essentially the same despite their increased advertising efforts.

     

    MOVE was the market leader up until a few years ago, but lost that position due in large part to the lack of complete listing information. High foreclosure rates that were in evidence following the housing crash very likely drove significant additional traffic to Zillow’s and Trulia’s sites, as these sites included listings for properties that competitor MOVE did not list. Because of an agreement with the National Association of Realtors., MOVE was not able to list a myriad of properties that included foreclosures and other non-realtor listed homes and apartments.  Two weeks ago that changed as the NAR in a special board meeting agreed to lift the restrictions on what MOVE could list to better able the site to compete with Zillow and Trulia.  Basically, realtors decided they’d had enough.  By the way, this is the first special board meeting by the NRA since 1996.  Clearly they saw that they had a problem with Zillow, Trulia, Redfin, etc. and decided they need to do something about it.  The NAR in a statement said they were committed to “making realtor.com® the first, best online destination for home buyers and sellers.”

     

    In addition, while housing prices are still rising significantly, it appears likely that the pace of new home sales has begun to moderate and will not maintain the furious pace that it has been seen in the last year as the housing market emerged from crisis and caught fire. June saw a drop in existing home sales as mortgage rates rose.  This also could contribute to Z missing wall street revenue estimates.

     

     

     

     

     

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1). Continued margin erosion and/or disappointing revenue growth causes wall street to wake up and see that Z’s massive valuation multiple is completely unjustified.

    Messages


    SubjectRE: RE: agree
    Entry08/09/2013 12:45 PM
    Memberril1212
    Angus--Yes, I'm still involved, I believe 2014 revenue growth will be >15% which is well above what everyone is modeling now (their largest product Showcase is 40% of revs and shrinking this year b/c it is tied to existing home listing count, listing count has started to rise, and the rest of the business is growing 30%+).  There is also the outside chance someone buys them if they can agree with the NAR's terms.
     
    xanadu--there is a difference between MOVE cutting Z off and the MLSs cutting them off.  MOVE's Listhub has nothing to do with the NAR.  While Z could "rebuild" the content I think that would be a stretch, hence them only having a handful of connections currently, if it was that easy they would have done it already.  In my conversations realtors have told me they find MOVE's pricing/monetization to be lower and more fair.  I don't think Z getting cut off is the most likely scenario, but I would not call it highly unlikely, and would be scared shitless as a Z long that one morning I could wake up and lose 1/2 my content

    SubjectRE: What is about to change?
    Entry08/10/2013 06:30 AM
    Memberscott265
    Since you appropriately question some of the authors assumptions, I'll do the same to you.  I think you are wrong in your use of realtor penetration as any sort of metric for a ceiling.  
     
    It seems to me the question really relates to how many visitors zillow has to their site and the characteristics of those visitors (value as a lead to a realtor or to a mover or a painter).  Imagine a world in which there was one realtor who could service the whole country with his/her team of 1k employees.  If that realtor was purely economic she would pay an amount that represented the value of those leads.   Or imaging if zillow hired 1k realtors themselves to service these leads (ala zip realty) would we be talking about zillow hitting a ceiling at a certain penetration level? 
     
    Zillow has viewers of a site and they will choose to monetize it as they see fit.  
     
    If yiu asked me the one number I want over the next ten years I would want to know the growth of unique users and how many are direct to site or use the app (versus purchased users via ad spend).  To be blunt, I could borderline care less about realtor penetration.  
     
     
     
     

    SubjectBarrons excerpt on Z
    Entry08/26/2013 10:02 PM
    Membermm202
    From this weekend's Barrons:
    -----------------------------------------
     
     
    THE CLOUD OVER HOUSING caused by rising mortgage rates didn't lift last week: Sales of existing homes jumped 6.5% in July from a month ago, but new-home sales plunged 13.4%. Yet while home builders have corrected nearly 30% since May, shares of Zillow (Z), a real-estate Website, have surged nearly 50% and are up 213% this year.

    Zillow collects fees from agents who list properties on the site, and makes money from bank and broker ads. Whether you see it as a housing beneficiary or a fast-growing tech whiz, you'll find a better bang for your buck elsewhere. Zillow shares now trade at 155 times projected 2014 profits. Its enterprise value is roughly 116 times cash flow; that compares with 16 times for Facebook  (FB), 12 times for Google  (GOOG), and seven times for home-improvement retailers. At these prices, Zillow's future growth will have a hard time living up to today's breathless anticipation. 


    SubjectHow prevalent is this?
    Entry10/04/2013 11:12 AM
    Memberreid3235
    I know Redfin and ZipRealty have released studies showing Z's/TRLA's listing data are significantly lower quality (i.e., many listings are missing and/or obsolete), which I assume is a function of Z/TRLA not having direct MLS hook-ups in many geographies, but does anyone know other markets Z has lost and/or been unable to tap into and whether this is a trend?  Thanks.

    SubjectAustin Board of Realtors pulls out of syndication
    Entry10/10/2013 08:59 AM
    Memberspecialk992
    Saw this on the twittersphere- https://www.abor.com/news_media/press_releases/2013/p20_13.cfm
     
    I think the HAR news posted below is a non-event, because Zillow and Trulia get listings syndicated from ListHub anyway. But this ABoR news is actually bad for Zillow and Trulia (but not MOVE). It sounds like they will stop automatically syndicating listings to Zillow and Trulia by pulling out of ListHub. While realtors will be able to choose to synidcate to Zillow and Trulia, it sounds like they are going to encourage members not to, and it's pretty clear that the realtors in control of this decision made it because they plan on not syndicating. Move's Realtor.com will still get a feed though.
     
    If this movement catches on around the country, look out. While individual brokers have publicly pulled out of syndication, this is the first time I'm aware of an entire city's MLS doing it.

    SubjectTeflon
    Entry04/04/2014 10:54 AM
    Membersidhardt1105
    Anyone have a sense of why this high flyer has avoided the massacre seen elsewhere?

    Subjectoverlap w/ TRLA?
    Entry06/16/2014 05:04 PM
    MemberWeighingMachine
    Does anyone have a sense for what % of Z's agent customer base are also advertising on TRLA?  Just trying to see what the synergy/dis-synergy potential of a merger would be...

    SubjectRE: RE: overlap w/ TRLA?
    Entry06/19/2014 09:24 AM
    MemberWeighingMachine
    Thanks for this - with that level of overlap the dissynergy risk seems material.  Do you happen to have the Tiger marketing deck?  

    SubjectRE: RE: RE: RE: RE: RE: RE: overlap w/ TRLA?
    Entry06/19/2014 04:38 PM
    Memberspecialk992
    Other obvious questions about the extreme bull case: If the ROI is so great, why is the (undisclosed) churn so apparetnly high? Why do you need an army of salespeople making cold calls all day every day if agents that sign up are minting money- shouldn't you just need a few order takers as the word of mouth spreads? Why have other real estate internet lead generation companies performed poorly to completely imploded, i.e. even if Zillow takes audience share due to a better user experience why aren't they taking market cap from an existing hugely successful RE online competitor? People have been researching real estate online pratically since the commercial internet existed.

    SubjectInteresting Citron report on Z
    Entry06/27/2014 11:18 AM
    MemberWeighingMachine
    http://www.citronresearch.com/wp-content/uploads/2014/06/Zillow-June-27a-final.pdf

    SubjectRE: RE: Interesting Citron report on Z
    Entry06/27/2014 05:36 PM
    MemberWeighingMachine
    This thing is a mo-mo monster... 

    SubjectRE: ListHub
    Entry07/02/2014 03:22 PM
    Memberstraw1023
    This issue has been discussed quite a bit on the MOVE thread.

    SubjectSimple question
    Entry07/08/2014 01:53 PM
    MemberNovana
    Apologies if question is basic, not familiar with US realtor market.
     
    Why do people look at number of realtors rather than brokers / estate agents in the US? A large estate agent may have many realtors working there but it will pay a flat subscriber fee as 1 Subscriber, irrespective of how many people work there, is it not the case? Every agent could eventually have a free profile on Z but in reality only the firm will take a Premium Agent subscription, no?
     
    If there are, say, 1m realtors but only, say, 100k estate agents (as in separate realtor groups), then market penetration for Z is not 53k/1m (5.3%) but more like 53%. What am I missing here?
    tx

    SubjectRE: Simple question
    Entry07/10/2014 09:58 AM
    Memberreid3235
    You typically buy/sell a house through an agent, but occasionally the agent is also a broker (attaining the "broker" designation requires additional training/classwork).  If you buy/sell from an agent, the agent technically answers to his/her broker who bears ultimate responsibility for ensuring the transaction is properly executed.  In most cases, the agent or broker work under the purview of a brokerage (e.g., Century21, Prudential, Keller Williams) for which agents/brokers operate essentially as independent contractors, so agents/brokers (not brokerages) are generally the "Premier Agent" subs buying leads on Z, TRLA, etc.  Some heavy hitter brokers might operate independently of one of the large brokerages and/or employ multiple agents and operate as the sole "Premier Agent" in their little fiefdoms, but I this sort of arrangement seems rare.

    Regardless, your market sizing seems directionally correct.  I've done calls with people at NAR who think maybe 150K REALTOR agents/brokers are active in residential real estate sales and can economically justify paying $300/mo for internet leads from Z/TRLA, so the 1M agent # thrown around by the sell side dramatically overstates the true TAM.  Also keep in mind that Z is not a new company/concept, so many of the agents in the TAM have tried and churned off, presumably due to dissatisfaction with results.  It would be helpful if the company reported churn so we could create a more realistic TAM, but, not surprisingly, none of the companies in this space report churn.

    SubjectRE: RE: Simple question
    Entry07/16/2014 07:40 AM
    MemberNovana
    Even assuming the TAM is 100k realtors and they are already past 50% penetration, how do you get comfortable that Average Monthly Revenue per Sub won't move from current $286 to UK / Australian levels (respectively c. $1,000 and $1,900 )? One could argue that because average commission level in the UK is only 1.5-2% Vs 6% in the US (3% on both sides), it could potentially go even higher. Where is the flow in this simplistic argument? Every agent I spoke to in the US says that the listings is not the competitive advantage of Zillow so hard to make the bear case (that Citron makes) that agents or MLS will withold listings as this is not a real threat to Zillow.

    SubjectRE: RE: RE: Simple question
    Entry07/16/2014 11:00 AM
    MemberWeighingMachine
    Here are some thoughts:
     
    UK /Australia do not have an MLS system.  To get a listing in front of a potential client a broker must use an online marketer which casts a very wide net such as Rightmove/ Zoopla.  Within 7-8 years of Rightmove's creation, it had 90% of agencies on it's system and was earning 70% EBITDA margins.  It had a must-have service which was evidenced in the numbers.  
     
    I'd further offer that in the UK where the buyer isn't using an agent, he is calling the selling broker via the listing on Countrywide.  This is completely different than in the US where the prospective buyer is seeing the highest bidder (an agent who wants to be the buyer's agent; unlike the UK, it is not the listing agent but a broker who wanted to be featured next to the listing).  In most cases in the US a serious home buyer already has an agent.  If he saw the listing on Zillow, he would call the agent he already has (irrespective of whether or not that agent is paying anything to Zillow).  
     
    Churn (though not disclosed) is estimated to be very high (30-40%)  suggesting that agents are unhappy with the current fee paid to Zillow.  I doubt they'd be receptive to a quadroupling.  
     
     

    SubjectRE: RE: RE: RE: Simple question
    Entry07/16/2014 11:29 AM
    MemberWeighingMachine
    There was a key typo in my post so I corrected (and re-posted w/ a highlighting of corrected area):
     
    UK /Australia do not have an MLS system.  To get a listing in front of a potential client a broker must use an online marketer which casts a very wide net such as Rightmove/ Zoopla.  Within 7-8 years of Rightmove's creation, it had 90% of agencies on it's system and was earning 70% EBITDA margins.  It had a must-have service which was evidenced in the numbers.  
     
    I'd further offer that in the UK where the buyer isn't using an agent, he is calling the selling broker via the listing on Rightmove/Zoopla (Paying to advertise on Rightmove creates value for the agent who is looking for a buyer).  This is completely different than in the US where the prospective buyer is seeing the highest bidder (an agent who wants to be the buyer's agent; unlike the UK, it is not the listing agent but a broker who wanted to be featured next to the listing).  In most cases in the US a serious home buyer already has an agent.  If he saw the listing on Zillow, he would call the he would simply call the agent he already has (irrespective of whether or not that agent is paying anything to Zillow).  
     
    Churn (though not disclosed) is estimated to be very high (30-40%)  suggesting that agents are unhappy with the current fee paid to Zillow.  I doubt they'd be receptive to a quadroupling.  
     

    SubjectRE: RE: RE: RE: Simple question
    Entry07/16/2014 12:39 PM
    MemberNovana
    Katana / ril,
    the point about competitive advantage is that from my understanding (I am not US based), listings are very easy to get and, again from my simple understanding, Zillow is currently relying primarily on MLSs but they are already trying to get alternative sources. If ALL MLSs will stop providing listings, Z will clearly be in trouble but a) this is unlikely to happen at once and b) in the process, Zillow will be able to acquire listings through different means. Their competitive advantage (eyeballs) will remain.
     
    Regarding UK/Australia, the simple point I was making is that Rightmove is today what Zillow was years ago since Rightmove was launched in 2000 and Zillow in 2006. Very simplistically, Zillow is 6-7 years behind Rightmove. 6-7 years ago Rightmove had an ARPA around £200 (not too dissimilar from Z) and today it's above £600, tripling in 7 years (high teens CAGR). What prevents Zillow's ARPA to triple in the next 7 years? I know churn seems high, I know agents are disgruntled but still, looking for a good explanation as to why $700 ARPA is dreamland for Zillow.
     
    Just FYI I think it's a short but looking to fully explore bull case

    SubjectRE: RE: RE: RE: RE: Simple question
    Entry07/16/2014 01:38 PM
    Memberreid3235
    Novana - You should re-read WeighingMachine's post.  Saying Zillow is 6-7 years behind RightMove is like saying Lenovo's smartphone business is 6-7 years behind Apple's; the markets/ecosystems are entirely different.  There are huge network effects to Rightmove's business; agents have to advertise on Rightmove because Rightmove gets (I believe) 84% of all listing-related page views in the U.K. -- and prospective buyers have to property hunt on Rightmove (thus pushing page views higher) because that's where all the listings are.  This dynamic creates tremendous pricing power for RightMove.
     
    Zillow is just a publisher of listing data that is available in identical form on dozens of other real estate sites, and the accuracy of Z's listings has been proven to be worse than many of its competitors.  (You mention Z "trying to get alternative sources" to MLS, but they're really just trying to direct-connect to local MLSs without going through MOVE's ListHub -- there really are no "alternative sources" in the U.S.)  I give management credit for building an audience, first by using its Zestimate gimmick and then by developing a good mobile app and marketing the hell out of its sites, but that's a function of the company having zero stickiness to its audience and no inherent network effects.  I'm sure the company can continue to better optimize ARPU in certain zip codes, but, like WeighingMachine said, churn is already rumored to be meaningful, so it's hard to imagine a tripling of ARPU without a corresponding drop in Premier Agent subscribers.

    SubjectRE: RE: RE: RE: RE: Simple question
    Entry07/16/2014 01:43 PM
    Memberspecialk992
    Rightmove/REA can charge those prices because putting a listing on their respective sites is practically the only way a listing can get in front of a large number of prospective buyers in those countries. You basically can't be a real estate agent in those countries without subscribing. It's a fundamentally different propsosition (akin to owning the only newspaper in town before the Internet) than Z/TRLA's model, which offers agent advertising for agents looking for clients (primarily home buyers). Due to the MLS and IDX websites, there are lots of places on the Internet for people to get listings information or look for agents. I think the only way for Z/TRLA to ever get those kind of ARPU increases would be if they successfully disintermediated the MLS. Which begs the question, how could they disintermediate the MLS while retaining their current revenue stream of agent advertising paid for agents who are part of the MLS system which protects the 6% commissions that enable them to afford the advertising?
     

    SubjectRE: RE: RE: RE: RE: RE: Simple question
    Entry07/16/2014 02:23 PM
    MemberNovana
    I see - so, to try and articulate an answer to Katana's point "why can't the U.S. market move to Australian position?", there are 3 main reasons
    1. REA / RMV are the only game in town in their respective markets and enjoy pricing power due to monopolistic competitive dynamics (please note that this is changing in the UK. On top of RMV and Zoopla, Countrywide now launched its own portal and Agents Mutual, a cooperative of real estate agents, will launch a new competitor to RMV/ZPLA called Onthemarket, so even in the UK things may turn out to be more challenging)
    2. REA / RMV are predominantly being paid, ultimately, by the seller agent as the buyer pays no fees on the transaction. In order to sell a property, you basically have to put it on the website so an agent has no choice really. In the US, Premier Agents are predominantly agents looking to be the buyer for a property already listed where an agency already has the seller's mandate
    3. Listings in AU / UK are generated by the single agents, hence the network effect. A single agent could decide not to give listings to REA / RMV but he would just lose out as nobody will go directly to his own little website. In the US, listings are provided by MLS / Listhub (much more concentrated) so if they were to stop providing a listing, the effect on Zillow will be substantial and they could attract eyeballs to their own portal

    Am I missing something else?


    SubjectAntiTrust question
    Entry07/16/2014 07:29 PM
    Membersidhardt1105
    Does anyone know the answer to the question, If TRLA bought MOVE could they still cut Z off from Listhub Or would that be seen as anti-competitive?

    SubjectPlacester / followupboss
    Entry07/17/2014 02:50 PM
    MemberNovana
    Has anyone done any work on these? Please see their websites:
    http://www.followupboss.com/
    https://placester.com/
     
    The former is a CRM designed for brokers and realtors doing pretty much what Zillow does (on their software side with agent portfolio CRM) but much better and cheaper ($103 a month for up to 3 agents).
    The latter is a Saas that designs website for realtors and automatically populates listings given its IDX integration with the local MLS. Again, super cheap from only $45/month.
     
    It appears that the hottest trend is for realtors to start building own websites to become independent as they feel they are becoming too reliant on Z / TRLA. The beauty for them is that for very little money they can get a beautiful website, looking super smart and save some dollars to invest in local marketing . I hear many agents are moving marketing dollars away from Z / TRLA into own websites, and these 2 products dramatically lower the costs of doing so. Has anyone heard similar feedback?
     
    One of the reasons this is very easy is because placester has direct deals with local MLSs so if an agent wants to create a website for, say, Seattle, it needs placester to have the IDX to the local MLS. Even if it doesn't have access to, say, Chicago, the local realtor in Seattle doesn't care.

    SubjectRE: RE: RE: Z/ TRLA merger?
    Entry07/28/2014 09:42 AM
    Memberstraw1023
    I have been quite wrong thus far so this is my over-priced 2 cents:
     
    As far as I can tell, the core difference between the bulls and the bears in how this plays out from a strategic perspective is whether the power lies with the agents or the agencies.
     
    As I understand it, the bulls believe Zillow is worth a ton because the top 20% of agents will use it to claim even greater market share and a greater share of the pie from agencies. The top 20% of agents will happily feed the beast because it will enable them to demonstrate their top-notch status and gather them leads in a virtuous cycle. Zillow is going to dis-intermediate both agencies and the bottom two-thirds of brokers.
     
    As a bear, what I think the bull case leaves out of the strategic interaction is the role of the agencies and their ability to quash the exercise right at the start. And I think the Citron hit piece over the weekend, to the degree it is accurate, demonstrates this. The top few agencies are tremendously powerful and realize that they are going to get dis-intermediated by zillow as their top agents become more and more powerful. Thus, I think Realogy, Berkshire, ReMax, etc. are going to cut this off at the pass in several ways:
     
    - Creating a powerful competitor
    - Charging a lot more for listings or cutting off listings altogether via MLS
    - Figuring out how to restrict their top agents from creating a virtuous cycle that benefits the top agents to the detriment of the agencies
     
    If zillow is worth tens of billions, then Realogy et al are shorts because it means that zillow dis-intermediated the agency.
     
     
     
     

    Subjectreason for 9% spread?
    Entry07/28/2014 01:32 PM
    Memberspecialk992
    Anyone have any theories on why the spread is so wide? While I was surprised by the news last week, the more I think about it this deal is extremely likely to go through. While they occupy a huge mindshare on Wall St., TRLA and Z are not really a huge share of RE advertising spending and not even a majority of online real estate traffic. It would be suicidal for TRLA shareholders to vote down the deal. Z voting is controlled by Richard Barton and Lloyd Frink, who have already agreed to support the transaction. There are very large shareholders in common between Z and TRLA and you have to imagine they like the deal. All stock so there is no financing contingency. Other than a very aggressive out-of-the-blue action by the FTC, this deal will go through yet there is a wide 9% spread that has been pretty constant all day.
     
    The essence of this transaction is trading a $1M dog for two $500K cats IMHO.

    SubjectRE: reason for 9% spread?
    Entry07/28/2014 01:39 PM
    Memberstraw1023
    I have had two conversations today that indicate merger arb desks think the anti-trust issue higher probability than you do . . . I have no strong opinion.

    SubjectNews Corp buying MOVE for $21
    Entry09/30/2014 07:03 AM
    MemberNovana
    This can't be good news for Z / TRLA:
    • Deep pockets to push marketing in short term to grab market share
    • Experience with REA in Australia will come to good use to MOVE. It's well known that MOVE website gives inferior user experience compared to Z / TRLA notwithstanding better listing quality. News Corp will work on that and probably fix it very quickly
    • ListHub negotiations - News Corp is run by financially savvy people. They will extract value from Z / TRLA in some form or another as contract gets renewed in Q1-Q2 2015

    SubjectRe: Bullish Case from Largest Shareholder
    Entry11/21/2014 02:01 PM
    MemberWeighingMachine

    I didn't find this very convincing.  Citron has addressed his idea of the $10bn in spending having to go 'somewhere'.  The internet is simply a more efficient means of commnicating the message and is unlikely to be anywhere near being captured by internet advertising (though it will grow). Z's 'business model' isn't set up to capture this (discussed in link below).  

    With regards to his comparisons to Rightmove/REA, this top-down comparison is ridiculous in my view.  


    SubjectRe: News Corp buying MOVE for $21
    Entry01/07/2015 04:39 AM
    MemberNovana

    Regarding 3rd bullet point below, an Inman article from yesterday suggests that Murdoch will stop Listhub from giving listings to Zillow from April 7th. This is uneqivocally bad news for Zillow and explains recent desperate attempts to get direct listings with MLSs. The problem is that these direct listings always come at a price (discounts, concessions, exclusivity, priority placing etc.) so the net effect on Zillow will be at the very least a net reduction in monetiseable inventory. Even after recent 30% decline in share price, company still trades on combined pro forma 9x EV / sales 2014 and 70x EBITDA. This is supposedly justified by group revenues growing at c. 50% in 2015 (as per Proxy document forecasts). We see very little chance of this happening.


    SubjectRe: Re: Re: Re: News Corp buying MOVE for $21
    Entry01/07/2015 10:11 AM
    MemberNovana

    The Coldwell Banker and the Douglas Elliman deals show, in my opinion, the direction the industry is taking. Yes - in some way or another Zillow will get to these listings but in exchange will need to give exclusivity (Douglas Elliman), price reductions (Coldwell Banker), control (e.g. which agents can advertise on each listing) or monetary compensation (Listhub?) to all these parties that until now were willing to provide the listings for free, no strings attached. It reduceds both the TAM (by reducing available sellable inventory) but also margins (due to discounts etc.)


    SubjectWhy is this up 18% today?
    Entry02/18/2015 12:56 PM
    Membersnarfy

    Another $1 billion of market cap added...


    SubjectRe: Why is this up 18% today?
    Entry02/18/2015 01:35 PM
    MemberWeighingMachine

    because people are morons.  I re-entered the Z short today.  It is VERY difficult for me to get to a fair value above 60 given numerous structural flaws inherent in the 'business'.  More realistically fair value is 30-40.  


    SubjectRe: Re: Why is this up 18% today?
    Entry02/18/2015 01:53 PM
    Membercuyler1903

    The S-4/A I'm reading from 11/10/14 indicates that Trulia mgmt sees pro forma EBITDA, including synergies, of $1.0bn by 2018 (267 trulia + 476 zillow + 285 synergies = 1028 total).  If you believe that isn't the stock trading at only 9 or 10x that metric?  That's using just fully diluted shares of 70.5mm x stock price, not sure if that is a true EV calc....

    Obv significant growth, but is that a mis-read?

    Cuyler


    SubjectRe: Re: Re: Why is this up 18% today?
    Entry02/18/2015 02:01 PM
    MemberWeighingMachine

    Given combined revenue of $585 mn for 2014 (326 Zillow + 260 for TRLA), this seems a bit hopeful.  Would seem to imply they could quadruple revenue and earn a 45-50% EBITDA margin in 4 years.  I'll take the under. 


    SubjectZillow already missing their targets
    Entry02/18/2015 02:56 PM
    MemberSlackTide

    In the S-4 their 2014 targets were $328 million in revenue and $53 in Adj. EBITDA...they just reported $326 million in revenue and $49.8 million in Adj. EBITDA, and that includes adding back $21.5 million in "acquisition related costs"....a number I have a little trouble believing.  

    If they can't even forecast their business a few months out, I have a hard time believing their 5-10 year forecasts (which includes a 10 year 28% revenue CAGR from 2014-2023).


    Subjectcare to elaborate on the exit?
    Entry07/27/2015 12:42 PM
    Memberspecialk992

    Obviously the stock is off a lot from the highs but it seems like it is still quite expensive with a lot of storm clouds gathering. The CFO quit, it is pretty clear the entire entity is losing advertisers on a net basis, the 2106 EBITDA numbers looks wildly too high, etc. Why exit now? Other than you can never count out Spencer Rascoff to convince investors to focus on "decades" while he sells all his stock in the now.

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