Zillow-Trulia, The Future Of Real Estate

| About: Zillow Group, (Z)


Even if rich, the acquisition of Trulia by Zillow makes business sense.

These dotcoms are less similar than they seem.

Zillow-Trulia will not replace brokers, but is at the forefront of real estate technology.

It has first-mover advantage in a highly-fragmented, technology-poor industry.

The road is therefore clear for Zillow-Trulia to grow rapidly.

It was about time: tech is finally moving into the real estate industry. It had lagged other sectors, but it is now rapidly catching up, with the appearance and success of crowdfunding websites, online brokerage companies and data platforms. A real estate start-up accelerator has even been created in Chicago, REach.

Real estate is now seeing the first wave of technology firms consolidation, most noticeably with last Monday's announcement of the acquisition of Trulia by competitor Zillow, for $3.5 billion in stock. The San Francisco and Seattle companies will remain independent brands, with Trulia's (TRLA) CEO reporting to his Zillow (NASDAQ:Z) counterpart. But they will create a giant capturing 71% of unique visitors to real estate websites. Zillow reported 83 million users for June 2014, and Trulia 54.

The logic behind the deal is simple: while Zillow and Trulia focus on home buying, they are really media companies, not brokerage businesses. As such, they generate revenues through advertising, and are thus in need of high traffic. Cost-cutting, network effects and pricing power are the financial dynamics behind the merger.

At first glance, the two sites appear to be twins. However, they have less in common than it seems. Zillow is favored by property buyers, Trulia by sellers. Two-thirds of Zillow's visitors do not use Trulia. Zillow's most popular feature is its "Zestimate" of how much a property is worth, while Trulia offers more analytical tools, such as detailed information on local criminal activity. And Trulia is faster-growing.

Certainly, the merger is taking place at a high valuation: Trulia is being purchased at 65 times the current consensus estimates for 2015 EBITDA, and the company is currently unprofitable. If the tech markets or overall stock markets dip, then Zillow-Trulia's pricing might decline with them. Profits and new investments might be somewhat delayed. However these companies provide a real service, and therefore, will continue to develop. Independently of market movement, they will grow over the long run, and their valuations will follow. Zillow-Trulia should be seen as a long-term investment. And the companies' strong management should appease investors: Spencer Rascoff, Zillow's CEO, co-founded Hotwire.com, and has the vision, backing and experience to develop an online platform to its full potential.

What are the consequences for real estate brokers and the way we shop for a house?

Well, perhaps not so bad. Of course, large real estate brokerage concerns will have more muscle than smaller outfits when negotiating the cost of their Zillow-Trulia marketing.

In certain industries, such as tourism, the internet has made redundant a large number of travel agents (think Expedia). Nevertheless, real estate is still a "people business" in which brokers are necessary. Buying or selling a house is an important and at times emotional decision which can require hand-holding. Computers have not put real estate agents out of business. Their number has actually grown from 140,000 in 2000 to 198,000 in 2013, according to estimates of the Bureau of Labor Statistics. It has not become more popular to list a property for sale without an agent - the number of for-sale-by-owner properties as a percentage of property sales has declined from 13% in 2001 to 9% in 2013.

An attractive aspect of Zillow-Trulia is that it does not have any very comparable competitor, either in business model or size. Zillow-Trulia is much larger in traffic and scope than Realtor.com and Homes.com, and it is different from firms such as ZipRealty.com (NASDAQ:ZIPR) or Urban Compass, which are brokerage firms employing agents. As demonstrated in the paragraph above, real estate brokerage has limits when being transferred online, and obtaining listings take more interpersonal skills than online advertising.

All the more, Zillow-Trulia has kept competitive threats at bay by acquiring and integrating fast-growing, local firms such as StreetEasy in New York.

Given its unique positioning in the market, a federal government antitrust challenge is a real risk. However, while it would impede the merger of Zillow and Trulia, it would have a limited impact on shareholders, and if anything, validate the dominant position of each firm.

Most likely, Zillow-Trulia will keep co-existing with real estate brokers and evolve to become akin to a "Wikipedia of homes", or perhaps even a "Facebook of real estate" if it adds the social network component dear to venture capitalists. As such, it has enormous potential. As the home buying process continues the irreversible transition into the era of tablets, apps and smartphones, Zillow-Trulia has considerable room to grow, between constant technological innovations and a very fragmented, local real estate industry.

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. The author has no business relationship with any company whose stock is mentioned in this article.

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