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Soaring Zillow Stock Gets Zinged

A big deal and secondary offering sent investors fleeing


It’s been a busy day for Zillow (Z) so far. To start, the company announced a deal to buy StreetEasy, an online real-estate site focused on the New York market. On top of that, the company also made a filing for a secondary offering of around 5 million.

Wall Street is not too thrilled with the news, though. Zillow stock is off almost 6% to under $87, which may be a sign that it is getting a bit toppy.

Housing Stocks: Tripping … or Falling?
Housing Stocks: Tripping … or Falling?

See, at face value, the acquisition has a lot going for it. For $50 million, Zillow has snagged a site that gets about 1.2 million monthly unique users. According to the press release:

“This acquisition gives StreetEasy the resources to further invest in product development and grow its audience, while offering Zillow clear market leadership in the country’s largest and most important real estate market.”

Sure, Zillow could have created its own platform in New York. But the market is a tough one to crack and includes a diversity of properties like condos, co-ops, new developments and luxury real estate. Plus, the company needs to keep gaining market share, and will probably strike other deals to help do so … maybe even outside the U.S.

As for the secondary offering, such transactions are hardly out of the ordinary for IPOs. Still, with the stock trading at more than four times its IPO price and close to new highs, it may be an indication that management thinks the valuation is fairly high.

Just consider that the shares of Zillow stock are currently trading at a nose-bleed 21 times its revenues for the past 12 months, vs. a multiple of 16 for rival Trulia (TRLA) and only 3 for Move (MOVE).

Of course, Zillow still remains a standout company with some big competitive advantages. At the core of the business is an enormous databases of more than 110 million U.S. homes. What’s more, the company has effectively expanded into other categories like mortgages, home improvement and rentals. Plus, Zillow has invested heavily in its mobile platform. In June, users viewed about 321 million homes on mobile devices.

But even great companies can easily fetch valuations that are just too high … and that seems to be the case right now.

All in all, it really isn’t surprising that high-flying Zillow stock is feeling some weakness lately.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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