Move.com (MOVE) ("Move") owns and operates a collection of internet properties "for real estate search, finance, moving and home enthusiasts and provide a comprehensive resource for consumers seeking the online information and connections they need regarding real estate." The domains include realtor.com, move.com,and moving.com. Move is also in the software-as-a-solution ("SaaS") business, with its product offerings including a customer relationship management system called TigerLead.
The shift in the revenue base is becoming evident in the financial statements, with software and services growing at a faster pace than consumer advertising. Software now makes up 22% of total sales, up from 18% in the year-ago period. This is important, because Move is transitioning its business model to achieve more visibility in its revenue stream from recurring SaaS revenue.
Interestingly, given the shift to higher margin SaaS revenue and after reporting its eighth straight quarter of sequential revenue growth (up 18% year-over-year) shares of Move.com have been under pressure since hitting a high just over $18 in October, before falling to its current $13.50 quote. That is good for a 25% loss, wiping out over $180 million in market capitalization, without any significant news driving the share price. Today shares can be had at a market cap of $530 million and a very reasonable 2.3x last twelve months' sales multiple relative to Zillow (Z) and Trulia (TRLA) which trade at 17x and 11x sales, respectively.
Given the wide disparity in the valuation multiples, I expect that Move is a prime takeover candidate by either one of the other firms (provided the National Association of Realtors permits it). Other acquisitions in the space include Trulia's acquistion of Market Leader (LEDR) for $355 million. Value in this sector is partly driven by relationships -- and trust -- given real estate purchases represent a big decision for homebuyers. That trusted name then is what drives value in this industry with respect to creating a relationship with potential home buyers and, in turn, realtors. Because Move owns and operates some of the most trusted (and trafficked) platforms in the web, I think Move is particularly sought after as a takeover target.
Move owns a collection of Internet properties that collectively generated 28 million unique visitors a month in the last quarter, up 22% year-over-year.
The interesting fact regarding Move is its affiliation with the National Association of Realtors ("NAR") in connection with an operating agreement that has been in force since 1996 that provides Move the exclusive use of the NAR multiple listing services. The agreement was recently amended to allow Move to obtain listing information from other sources (rather than solely from NAR) in order to enrich the content available on its site, with the ultimate goal of making it more competitive relative to other services. The increased coverage to other market segments, including short sales and distressed properties should allow Move to become known as a one-stop shop for real estate research, sales activity and lead generation services.
Move is also rolling out newly designed mobile apps to increase their usefulness and customer engagement, and signed deals with various local realtor assocations to provide SaaS services to its constituents which includes over 26,000 members.
While the macro economic reports with respect to the housing market have been mixed of late, I think the 25% pull back in the share price and the wide disparity in valuation multiples to Zillow and Trulia is creating an interesting investment option. I think we can all agree that the residential housing market in the US appears to continue its recovery, and that Move should continue to benefit from that tailwind in the form of customer advertising and subscriptions to its collection of SaaS applications. Having said that, there is certainly competition in the sector.
Capital Structure - Share Buybacks
One thing of note was an interesting transaction that occurred in Q3 2013 whereby Move issued $100 million in convertible notes, with a commitment to use up to $25 million of the proceeds to retire common stock. I understand that Move retired some 1.8 million shares at about $13.90/share in privately negotiated transactions.
Based on my read of the 13-F filings, it appears like Move bought back most, if not all the shares, from Nierenberg Investment Management, a well respected value fund in the small cap space. It appears as if Nierenberg used the appreciating stock price in 2013 to scale out of its investment which I understand from various 13D filings began in 2008 after the stock began to collapse on account of the housing crisis.
While I can't be certain of the underlying reason for the sale, one has to ascribe at least some weight to the fact that at least one successful value fund who is intimately familiar with Move decided at about ~$14/share that the risk/reward ratio wasn't favorable any longer.
Having said that, the 25% pullback from October and the continued improvement in the underlying numbers (18% revenue growth, transition to SaaS business) suggest to me that Move is positioned to move higher, and could be considered an acquisition target given its relative undervaluation to its competitors.
Move is relatively undervalued in an generally overvalued sector. In my mind, the current price at about 2.3x last twelve months' sales is a decent price for investors who are considering an investment in a company levered to residential real estate and own/operate valuable digital properties. If Move is successful in building out its SaaS offerings, its revenue base will be become more visible and higher margin in nature. More risk-averse investors may wish to set limit orders at some lower price or sell puts to establish a position at synthetically lower prices. Given a broad market pull back, a name higher up the risk spectrum like Move could get disproportionately hit. That said, if Move puts together another 18% top line growth number when it reports, I suspect investors will re-rate its growth profile.
Therefore, investors considering Move should probably get introduced with a starter position (or alternatively, wait for a pullback) for this business that is levered to an industry with secular tailwinds and a light weight business model. Over time, I expect that the numbers will take care of themselves given Move's brand recognition and recent efforts to expand its SaaS offerings.
Like I stated above, I wouldn't be surprised if on further price weakness that Move becomes an acquisition target, although I understand that its operating agreement with the NAR gives the NAR the right of first refusal on any acquisition potential.
In the long run, staying a standalone public company may serve shareholders better anyway, since the firm appears to have a considerable runway of growth potential ahead of it.