According to the S&P Case-Shiller U.S. National Home Price Index, home prices in March were up 1.2% over the last three months and 10.2% in the past year. And as those prices march upward, home buyers face a daunting task in valuing potential purchases.
As a result, real estate information sites Trulia (TRLA) and Zillow (Z) have become indispensable. With plenty of room left for home prices to grow, though, there’s a dogfight between the two data providers.
Who will win? Well … more importantly, which stock should you own? Let’s discuss.
Last August, I explained why I thought Trulia’s IPO wouldn’t be as successful as Zillow’s. Boy, was I wrong. Since Trulia went public on Sept. 19, 2012, its stock has gained 84.4% through May 28 compared to 23.9% for Zillow. It appears my call was an utter failure.
Or was it?
If you look back at Zillow’s IPO on July 19, 2011, it gained 78.9% on its first day of trading compared to 41.2% for Trulia on its first day as a public company. Furthermore, Zillow’s aftermarket return is 57.8% — 27.2 percentage points higher than Trulia.
There’s only one way to settle this, and that’s to annualize their returns. On that score, it’s pretty close, but Trulia’s annualized return of 84.4% beats Zillow by 810 basis points. While neither company is singing the blues, Trulia must be considered the more successful IPO at this point in the game.
But Will It Last?
In early May, Trulia announced that it was acquiring Market Leader (LEDR) for $355 million. Market Leader provides real estate agents with comprehensive software-as-a-service subscription-based products that generate leads more effectively by helping them market their businesses better. Trulia CEO Pete Flint called Market Leader “an excellent strategic fit.” I have no reason to doubt it isn’t.
However, my concern about Trulia last August was its profitability, and although it has made progress in that regard, it still lost $1.5 million from operations on $24 million in revenue in the first quarter ended March 31. Now it has gone and bought Market Leader, whose operating loss was $2.8 million in Q1 on $13 million in revenue.
I’m sure Trulia’s management sees this as a case of one plus one equals three, but until it can show it can be profitable on a consistent basis, I’m from Missouri.
To make matters more confusing, Zillow delivered a $3.8 million operating loss in Q1 compared to a $1.7 million profit in the first quarter last year. However, the culprit was a 138% increase in sales and marketing expenses as it ramped up its sales staff to build its Premier Agent ad platform.
In the first quarter, Zillow added 4,557 Premier Agent subscribers, bringing the total number to 34,030. So at $259 in monthly revenue per subscriber, it added approximately $14 million in revenue over a 12-month period. In total, its 34,030 subscribers provide $106 million in revenue annually. If Zillow can continue to grow this platform by 83% each quarter, the expense is clearly worth it.
One of the questions I had with Zillow in my last look at the two companies was its mobile business. While Trulia reveals its monthly unique visitors — 11.4 million in the first quarter of 2013 compared to 5.1 million in Q1 2012 — Zillow does not. However, Zillow does reveal that 55% of visits to Zillow occur on a mobile device. With average monthly unique visitors in Q1 at 46.7 million, extrapolating the 55% figure gives us 25.7 million for mobile, more than double Trulia’s.
In my previous article I estimated the mobile number at 16 million, which means an increase of 61% over nine months. Zillow’s not doubling its mobile numbers like Trulia is, but it’s pretty darn close. However, until Zillow puts out a number with the same exact phrasing as Trulia, I’m wary of Zillow’s claims in the mobile market.
In terms of valuation, Goldman Sachs just upgraded Trulia from “neutral” to “buy” with a price target of $38. Analyst Debra Schwartz believes that Trulia’s April lock-up expiration caused investors to back away from its stock, and in doing so created a valuation gap between itself and Zillow. Specifically, Schwartz believes Trulia’s enterprise value should trade at 6.5 times sales on a forward basis; the same multiple as Zillow. Deutsche Bank analyst Lloyd Walmsley holds the very same opinion, and took the very same actions (upgrading and new target price) as his Goldman counterpart.
Clearly, analysts feel both companies deserve lofty valuations given what’s going on in the housing markets.
This is one horse race that’s too close to call. While Zillow is the industry leader, Trulia is charging hard. Furthermore, Zillow’s reticence to reveal its mobile monthly unique visitors tells me it’s not nearly as transparent a company as it could be.
Therefore, although I originally felt Zillow was the horse to back, I now see Trulia as the ultimate winner. Maybe not in six months … but definitely in six years.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.