Zillow's (Z) stock has taking a beating post Citron's recent research report. In my previous article, I discussed how Citron failed to adjust for one-time items in Sales and Marketing expenses and selectively represented key facts. In this article, I am discussing Citron's other points as well and why they don't make sense.
Before starting, I will recommend readers to go through my previous article. Here's a summary:
a). Citron hasn't accounted for one time expenses ($7.1 million) in Sales & Marketing
b). Citron hasn't taken into consideration $8.4 million increase in television advertising spend which is going into brand building (longer payback time)
c). Sans these items, 43% yoy increase in the company's sales and marketing expense lead to 69% yoy increase in revenues showing operating leverage in the model.
The following is a brief reply to other quantitative and qualitative arguement in Citron's report
Zillow's revenue comes from agents paying for leads rather than advertising
Zillow is following cost per action/cost per lead model rather than doing display or CPC advertisement. Cost per lead is a better proposition for the company's core customers => realtors.
Lacks of operating leverage because it uses television commercials and a direct salesforce
No doubt, LinkedIn (LNKD) and Facebook (FB) have a huge advantage as they don't have to spend on advertising to attract visitors. But whenever sales to SME customers is involved, the companies need to have a direct sales force. LinkedIn doesn't have to spend on advertising to gain visitor but it still spends 33% of its revenues on Sales and Marketing to gain advertisers (recruiters). Does it mean that LinkedIn doesn't have operating leverage in its business model. Not really - even according to Citron Research.
Once television advertising stabilizes at current levels, Zillow is bound to see similar operating leverage by 2QFY14.
Zillow doesn't own its content
This is same as saying Facebook and LinkedIn doesn't own their content. Zillow is a platform which commands value because of its user base, while content is a commodity freely available across the internet
Sell side EPS estimates have come down.
There is a good reason for it -- increase in television advertising spend. What Citron forgot to mention is increase in revenue estimates since the beginning of this year. The following is a list of revenue estimates from various sell side analyst around the beginning of this year.
Sell Side estimates at the beginning of this year
Estimated Revenues (USD millions)
Current consensus estimates are $190 million for FY13 and $269 million for FY14. Also, Zillow is a growth company and in all likelihood buy-siders were skeptical of sell sides estimates at the beginning of this year. The company has not only met expectations but also exceeded it. Compare this with % increase in LinkedIn's topline estimates for FY2013 and FY2014 since the beginning of this year. You will get the answer why Zillow has outperformed LinkedIn (up 110% Year to Date).
Mindshare among homebuyers is not monetizable because real estate brokers (and not the home buyers) are Zillow's primary customers.
Zillow's mindshare among home buyers => better and more comprehensive list of leads => more value to realtors who buy leads from Zillow
If a realtor decides to use only one lead generation service, it is likely to be the one which is market leader in the space.
To sum up, most of the allegations which Citron has presented are based on selected data points and do not show the complete picture. If you want to play it as a valuation short, its your will. But the best days for Zillow from fundamental perspective are still ahead of us.