Investors in Trulia (TRLA) took another beating after analysts at Goldman Sachs downgraded the stock, fueling recent negative momentum even further.
Over the past two months, shares have seen a roughly 40% pullback as investors took profits, also on the back of a third quarter earnings report which was not impressive. Yet I think it is too late to bet on a further short term correction as both the absolute and relative valuations seem fair.
Goldman Turns Cautious
Analysts at Goldman Sachs (GS) downgraded their rating on Trulia from "Buy" to "Hold," while cutting the price target by ten dollars. The new $41 price target still suggests some 20% upside from Friday's levels, and even greater potential given the sell-off on Monday in the wake of the downgrade.
Analyst Heath Terry cites softer housing demand behind the downgrade. He continues to believe that Trulia should and will grow consumer and real estate agent adoption. Further growth should be mostly driven by mobile product investments.
Yet Terry notes that the housing market environment is providing less tailwinds, and notices that the company might lose mobile consumers due to aggressive marketing by Zillow (Z).
The valuation at 22 times enterprise value in relation to expected EBITDA for next year creates a risk of deceleration of growth in the housing environment. Multiple expansion is limited unless Trulia can create significant leverage from the acquisition of Market Leader, and re-accelerated growth.
Trulia ended its third quarter with $43.4 million in cash and equivalents. Total debt stands at $8.0 million, resulting in a net cash position of around $35 million.
Revenues for the first nine months of the year came in at $94.0 million, up 97.8% on the year before. The company reported net earnings of $2.6 million, compared to a $9.3 million loss last year. Note that this year's earnings are entirely the result of a $16.8 million income tax benefit.
Revenues for the year are seen around $143 million, as GAAP earnings are seen around break-even.
Factoring in significant losses on Monday, with shares trading around $32 per share, the market values Trulia at $1.2 billion. Operating assets are valued just a tiny bit below that. This values operating assets of the firm at around 8 times annual revenues.
Trulia does not pay a dividend at the moment.
Some Historical Perspective
Back in September of last year shares of Trulia were sold to the general public at $17 per share. Shares immediately spiked up to levels in their mid-twenties to fall to lows of $15 in January of this year.
Ever since, shares have seen significant momentum to levels in their low fifties by October of this year. From these levels shares have seen a 40% correction to current levels around $32 per share.
The strong headline growth rates are driven by Trulia's acquisition of Market Leader earlier this year. In May of this year, Trulia bought Market Leader for $355 million, a significant amount for a firm reporting annual revenues of $45 million in 2012. Investors were happy with the deal as it added more scale and growth, giving Trulia ammunition to compete against Zillow. The price tag represents a discount on revenue multiples compared to Trulia's own valuation, although Market Leader's reported growth was slower.
Partially as a result of the deal, reported revenues were up by 117% to $40.3 million over the past quarter. The deal added significantly to Trulia's operations. While Market Leader only has 6.2 million unique visitors per month, this compares to Trulia's traffic of 35.3 million unique visitors per month.
Combined both firms now have some 56,000 subscribers, after adding a combined 5,900 accounts during the third quarter. Average selling prices per user increased to $186 and $155, respectively, for Trulia and Market Leader.
Note that pro-forma revenues, including a full quarter contribution from Market Leader, came in at $48.1 million. The guidance of fourth quarter revenues of $48.5 to $50 million for the fourth quarter seems little ambitious given these pro-forma results, indicating very low growth on a sequential basis.
Since the earnings report, shares have roughly lost another quarter of their value. The significant momentum which the stock has seen this year obviously creates greater volatility given the recent pullback. That being said, Trulia trades at a significant discount compared to Zillow on a comparable basis, reporting similar quarterly revenues, while the market attaches at $2.6 billion valuation to Zillow.
On a comparative basis, shares are expensive although revenue multiples are coming down rapidly amidst strong revenue growth. The lack of earnings makes a traditional valuation analysis a bit difficult however.
I reiterate my stance. I would be slightly more optimistic than the market is reflecting now. The absolute valuation multiples are high, but the valuation is justifiable given the key position in such a large market. Relative valuations remain in check as well, especially versus Zillow. I would be very cautious to jump on the momentum bandwagon to initiate a shot position.