Zillow: You Got to Be Nuts

| About: Zillow Group, (Z)

With Wall Street Journal headlines like "Zillow (NASDAQ:Z) Zooms 79% in IPO," I'm wondering to myself, "Who on earth is dumb enough to buy and hold this stuff long-term?" What's even more outlandish in my opinion is that a company that isn't even profitable gets a single letter ticker symbol, which is effectively the holy grail of ticker symbols.

Reasons you should sell:
1. Not profitable. After crunching the numbers, as I have addressed before, Zillow is not profitable and is trading at a market cap of over $1B. The CEO spins this as cash flow positive.
2. 13% of the company was sold, so let's be honest -- this isn't a public company. It's still very much privately held considering that existing investors are taking a larger stake according to the CEO. These sliver deals are supporting abnormally higher prices.
3. This is what you would call a poorly-sized deal. What you have is a market for consumer Internet companies that greatly overwhelms supply as a whole. The net result of this is that lots of these types of companies are lining up to be sold. This is a repeat of the tech bubble of 2001. Effectively what you have is companies selling small portions of themselves at high prices and the market not having enough shares to trade given the quantity of dumb money that wants to invest in these types of companies. The market drives up the prices as investors fight over a small quantity of shares. For example, if you have $10B of dumb money chasing what is intrinsically worth $1B in freely tradable shares, market capitalizations do not matter in the short term. Valuations will rock higher until shorts are able to get involved and as long as the floats remain small, the shorts can get squeezed out. This trend will persist until the dumb money starts to get overwhelmed with share supply, which naturally will happen but takes time. Signs of this inevitability are that Zynga and Facebook intend to go public. If it was me, I'd sell my entire stake of anything in this sector given my perception that discounting the cash flows; you've got to be nuts to be a buyer.

When demand is hot, returns are not. If you are looking to buy and hold this for 10 years, you've got to be nuts. This entire sector is overvalued. Sell the stupidity if you own it and if you don't own it, let the stupidity perhaps drive it even higher and then let's profit from a short together. If I was anyone who could sell shares or sell my stake, I'd be selling out ASAP. Prices like these are not going to last indefinitely.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.