Zillow: Tech Bubble or Tech Darling

| About: Zillow Group, (Z)

By Matthew Kloster

Another tech company riding the large technology IPO trend hit the market yesterday and results, while impressive, did not shock a lot of people. Zillow Inc. (NASDAQ:Z) is a real estate website that lists over 100 million homes for sale or rent. They also have a formula for estimating the actual value of houses to give consumers a good idea of what the actual value of the house is given current market prices. They hit the market like other companies such as LinkedIn (NYSE:LNKD) and Yandex (NASDAQ:YNDX) and had the prices skyrocket over the first day of trading starting at $60, three times the IPO price of $20. The price, however, dropped back down to $35.77 by the end of the day which is still 78.9% above the IPO price.

The last trade price of $35.77 values the company around $950 million, which, while high, is a lot less than the $1.6M it was valued at early in the day. Shockingly, this all comes from a company that has never made a profit in its history, last year experienced a loss of $6.8M. The whole purpose of the company is to sell homes even though the rate of people are buying homes is the weakest in over 14 years, so why are people so eager to get a piece of this stock? While the company has never seen a profit, it is growing at an incredible rate. The loss in the past quarter was only $826,000 compared to the $2.8M in the same quarter the previous year, and revenue growth grew 74% in 2010 to $30.5M. Also, its unique user count in May was 22 million which is double the number from last May. One main reason investors are going crazy for this stock seems to be the double digit growth even in a slow, flat economy especially since the market it is targeting is currently doing terrible. This leaves a lot of room for more growth when the economy picks up and people start buying more homes.

Advertising is the only real source of revenue for this company, which means the more viewers the more money. Twice as many people are already visiting the site compared to last year and the noise from the IPO will only bolster that number. Not all tech IPOs have sustained such high prices after a big increase on the first day such as Pandora (NYSE:P) which is trading at only 10% above IPO price. Skullcandy (NASDAQ:SKUL) also had its IPO recently and the price has stayed relatively the same. The difference with Zillow seems to be hitting an untapped market. Everything these days is becoming web based from the way we communicate to the way we buy goods, so why not real estate? This site has taken the idea of many other companies and applied it to a different market with great success. Luckily for them, investors seem to be drawn to anything that is web and app based which gave rise to the perfect time for an IPO and allowed them to raise a total of over 74M. The great growth over the past year even in a troubled market and the capability for large future growth has most people excited about this stock. Should the company be valued at $1.6 billion or even $950 million, probably not, but growth prospects shed a gleaming light on the company which should continue to grow over the next few years. I am not convinced on buying this company now, but keeping a close eye on it over the next month may lead to a future purchase.

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