Tuesday, November 19, 2013

3 Key Takeaways From Zillow's Earnings Call

Zillow (NASDAQ: Z  ) is facing increasing pressure for the leadership position in the online real estate marketplace. The recent purchase of Market Leader by Trulia (NYSE: TRLA  ) places it in a more comparable position based on revenue. Move (NASDAQ: MOVE  ) continues to make long-needed enhancements to realtor.com, but it has fallen far behind the monthly unique users, or MUUs, of Zillow and Trulia. 

The previous week's earnings call for Zillow provided several key numbers that suggest the leadership position isn't as much in question. While Trulia made a big step forward on the professional agent aspect of the business, it fell even further behind on traffic to its core sites. In addition, Move recently got approval to become more competitive via quicker updates to the primary website, but the consumer traffic levels suggest it might be too far behind to catch up. After all, President Obama chose Zillow to participate in a discussion on the real estate market, but not the other two companies.

Market share expansion
Not only is Zillow seen as the leading real estate marketplace brand, it continues to grow market leadership. According to comScore, the desktop market share grew during the third quarter to 34% from 27% last year. In mobile, Experian's Hitwise listed Zillow as having nearly double the market share of the second-place brand.

This market share leadership was evidenced by Zillow averaging 61 million MUUs during the third quarter, with a record 64 million unique users in August alone. Trulia reported 35 million users for the Trulia business line and 42 million total, counting the added Market Leader users. Move saw 22% growth, but total MUUs only reached 28 million.

New York opportunity
Zillow recently purchased StreetEasy to capture the distinctive New York real estate market. While the site draws 1 million MUUs, the interesting stat is that the New York market generates $1.9 billion in annual agent commissions. This amount is so large that it reaches 60% of the Australia market and 33% of the U.K. Being able to achieve a commanding market share in the largest real estate marketplace could provide a commanding lead in becoming the dominant player. Perhaps even more interesting is that New York house rental transaction volume exceeds for-sale transactions.

Expanding agent ad spend
The number that's sure to cause significant debate is the projected expansion of agent advertising spending. Zillow proposes that, due to a higher return on investment from advertising dollars spent on its website compared to traditional media forms, agents will be more likely to spend a larger percentage of commissions. The ultimate question is whether that ROI can be maintained as more agents move onto the site and the leads become more competitive and, hence, expensive to obtain.

Agents currently spend an estimated 10% to 20% of their $60 billion in commissions on ads, with the majority choosing print and traditional media forms. Zillow projects total advertising levels will jump to $20 billion or more with agents willing to spend up to 40% of commissions on real home buyer clients. The company claims that these numbers are consistent with international comps.

Worth noting is that Zillow, Trulia, and Move combined are only expected to generate roughly $600 million in revenue this year. Those numbers are bolstered by non-agent advertising revenue such as display ads and mortgages.

Bottom line
Zillow took the best shot last quarter from the top competition in the online real estate marketplace, separating itself in the process. That's a clear sign of a market leader and future dominant player. Valuations of Trulia and Move are compelling compared to their growth rates, but the second and third players in a market tend to have lower valuations.

With Zillow trading at roughly 10 times forward revenue estimates, most investors will have issues with the valuation. Ultimately though, the market leader in the online real estate market will likely attract valuations similar to other segments (like cloud software and social media) that would place the stock beyond a market cap of $3 billion. With revenue growing above 50% and Zillow likely to take market share as it becomes the dominant player, it will quickly grow into an even larger valuation.

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