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Summary

  • Zillow's target price upgraded to $130 on a buy rating from Canaccord Genuity.
  • A Zillow and Trulia merger would help with pricing power, and synergies with marketing.
  • Six investors own a significant stake in both Zillow and Trulia.

Zillow (NASDAQ:Z) is now back to new highs after being upgraded by Canaccord Genuity, which boosted its price target by 13% from $115 to $130. Zillow is trading at 132.00 today. Canaccord analyst Michael Graham explained his price target and why he maintains a Buy rating on the company;

"We believe the core premier agent business remains in very strong shape, the mortgages segment is evolving nicely, and rentals is making progress towards the longer term,"

Currently Zillow has 675,000 real estate accounts created freely on the company's site, of those 53,000 are Premier Agent Subscribers who pay different amounts to advertise on the site. But with only 7% of subscribers being paid members, the room for growth is huge. This is one of the reasons many see Zillow being able to continue to hit its numbers.

Zillow and Trulia Merger?

Graham cites that there is a small number of investors that own both Trulia (TRLA) and Zillow, which could lead to possible talks between the two companies;

"We note that six investors own 52 percent of Zillow and also hold 42 percent of Trulia, potentially reflecting their desire to see consolidation."

Further Graham predicts and explains how Zillow And Trulia the possible gains that can be made by these two companies;

"There are 350,000 'thought leading, high-producing' real estate agents in the U.S., only about 25% are using either Zillow or Trulia. That could accelerate to near 80% of those agents in a 'short amount of time'... we continue to be struck by how early the online real estate vertical seems to be in its development."

Zillow's monthly unique visitors climbed 49% year over year during the month of May, while Trulia's jumped 47% during the same time period.

Canaccord Genuity believes that if Zillow and Trulia merge, the synergy would allow for rapid growth, and an increase in the share price over time. Further, Graham, suggests that a deal struck between the two companies,"could be quite accretive to Zillow even before factoring in any revenue synergies from pricing power."

Advertising Campaigns are Generating the Right Types of Returns

Zillow and Trulia are planning to spend about $100 million this year on advertising. Zillow started advertising in 2013 for the first time in the company's history. Last year the company spent $40 million and saw great returns as the company now boasts 52,928 Premier Agent Subscribers, a one-year growth of 56%, with an average monthly revenue per subscriber at $286, up 10% since Q1 2013. Further, revenue generated from Premier Agent subscriptions was $46.2 million in Q1, up 77% from Q1 2013.

Both Zillow and Trulia see that the real opportunity is in mobile. Trulia spent a total of $71.4 million on sales and marketing in 2013. Zachs Equity Research pointed to a possible issue Trulia's investments in marketing activities. Though the company is increasing the traffic to the site, these investments are decreasing the company's margins. Trulia's operating expenses in the last quarter increased 158.3% year over year, impeding on the 127% surge in its top line, which affected Trulia's bottom line with losses widening on a year-over-year basis. Trulia's Chief Marketing Officer Kira Wampler discusses the companies aggressive strategy towards advertising

"We've got [the product] nailed, now its time to pour on the gas, At the moment no one has run away with the market particularly in mobile."

Zillow has worked out that during the workweek, around 66% of the company's overall traffic comes from mobile devices. That number peaks above 70% for the weekend. Investors can see why both Zillow and Trulia are going after the mobile market. Further this points to a key aspect that could be leveraged if the two companies merged. They are both spending the same ad dollars going after the specific market, but more importantly they are changing the way that home buyers and sellers are looking at the real estate market. Zillow's Chief Marketing Officer, Amy Bohutinsky explains this trend in mobile;

"This is the way people shop for homes today. So to fuel this advertising campaign, we did, and continue to do, an enormous amount of research where we talked to buyers around the country, asking them what's important to them when they shop for a home? We heard loud and clear from people. Mobile is a big part of that home search, because they're fitting it in when they're at work, when they're on the bus, when they're sitting in bed at night on their iPad, showing it to their spouse."

The products we use like tablets and phones go with us everywhere, so when you're walking down the street, and see a home in your neighborhood for sale, it's easy to look it up on one of these two websites, using their apps, and see the listing price. The ease of access to further information about homes is what these two companies have provided users for free. Home buyers can see how the seller has reduced the home's price over the past months, or how much the home sold for the last time it was on the market.

Due to the fact that Zillow is currently trading at $130, and that Trulia was up significantly after the upgrade and consolidation recommendation, I would remain on the sidelines and possibly wait for a overall market correction before I would buy.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Zillow Upgraded, Talks Of A Merger With Trulia