On July 19, after Zillow (Z) priced its initial public offering at $20 per share, I wrote an article arguing that the valuation at $20 per share was a full valuation. When Zillow started trading on July 20, the stock traded up above $35 per share, where it has a market capitalization of over $1.1 billion and an enterprise value of approximately $1.05 billion. Remember that this is a company that only generated $30.5mm in revenue in 2010. Therefore, the current valuation represents almost 35x 2010 revenue. If we assume revenue grows at 100% in 2011 and 2012, 2012 revenue would still represent over 8.5x revenue. If it grows another 100% in 2013, the multiple falls to a still loft 4.3x revenue. Said another way, investors think the company is going to have incredible growth or they think/hope that other investors will think that the company is going to have incredible growth.
The potential EBITDA generation given the 100% growth three-year scenario discussed above and a 30% EBITDA margin in 2013 results in 2013 EBITDA of almost $75mm, which implies an enterprise value to EBITDA multiple of 14.3x.
I agree that Zillow is a useful tool when house or apartment hunting, especially via a mobile device. Further, at some point in the next few years the U.S. real estate market will pick up. But even today when people are not buying houses, they are still renting -- so how much additional revenue will the company generate from a revitalized U.S. housing market?
Zillow offered 3.5 million shares in its IPO (which could increase to 4 million if the underwriters exercise the greenshoe, which they will likely exercise) out of a total share count of 27.5 million. This means Zillow only offered 12.7% of the shares to the public. Often IPOs offer between 20 and 30%. As a result, the scarcity value could be driving some of the price increase we are seeing today. Since no insiders sold in the offering, there will likely be a follow-on offering when lock-up expires, especially if the price stays at such a lofty valuation.
At these levels, I believe Zillow is over-valued. Anyone considering an investment should carefully read the risk factors in the IPO prospectus and consider the valuation.