Zillow, Inc. (NASDAQ:Z)

CAPS Rating: 2 out of 5

Recs

7
Player Avatar jed71 (30.19) Submitted: 9/20/2011 12:23:29 PM : Underperform Start Price: $25.75 Z Score: -197.69

Having "useful information" or "great data for homeowners" on a website is one thing. Actually leveraging that information to create an income-generating business model is something else entirely. No one is saying the website isn't both functional and useful, but the method by which they are attempting to generate revenue and earnings seems pretty tough to me.

For a stock with a market cap of $800MM, you would think the company would generate more revenue and sales. For the first two quarters of 2011, they have generated a whopping $27MM in revenues. They also sport a P/B of around 37. While P/B is not necessarily the best method for valuing a growth company, it gives you a glimpse into how rosy the current shareholders estimate how well a company can use its existing assets to generate future earnings. In this case, the shareholders seem to think Zillow can grow at 20% plus for the foreseeable future (10+ years). Somehow I doubt it. They have also shown positive earnings for a whopping one quarter of about $.06 per share. I just don't think these figures justify the astronomical valuation being assigned to Zillow.

Further, the revenues are generated from what I think are less than reliable sources. They are a subscription service for real estate professionals - I can't think of a group of professionals struggling more than those working in the real estate industry. As everyone knows, home sales are down big and it’s questionable whether Zillow will be able to continue to grow revenues under this stream. They also sell advertising to mortgage companies and other firms. This is a very competitive market, in which rates have been driven lower due to the high levels of competition for advertisers on the internet. Can they continue to grow this segment? Maybe. But I wouldn't be willing to bet on shares as expensive as these. Down thumb for now, until they have proven earnings and revenue streams can grow at a fast clip, in order to justify current valuation.

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