ZipRealty: Challenging Times, But

In 2007 we discussed the online real estate industry and ZipRealty (ZIPR). In this post, we will take a look at Zip Realty’s recent situation, its performance and options.

The online real estate industry has been hit by the slowdown in the U.S. real estate industry and a credit crunch. ZipRealty, a full-service real estate site, registered revenues of $28 million in 3Q07 - a meager 7% over 3Q06. It reported a net loss of $4.8 million. Currently, the stock is trading at $5.24 with a 52-week range of $4.41 - $7.98, and has a market capitalization of only $122.5 million.

However, ZipRealty’s performance was much better than the industry, as its closed transactions declined by just 5.2% in 3Q07 compared to the industry’s decline of 38% y-o-y, and registered 30% growth in the number of Zip Agents. The management expects 2007 revenues to be between $97.5 – 102.5 million and in 2008 it expects revenues to grow by 12% - 18%.

Considering the circumstances, this is not a bad result. But, the market is expecting worse as the country is facing an impending recession, rising unemployment, reduced consumer confidence, lower wages and a tightening of credit, which are all expected to cause a decline in new listings, transaction volume and sales.

This could be bad news but, Zip Realty has been working on lowering operating costs, improving services, and increasing its market share. The Company has been steadily gaining more of a market share.

I see this as an opportunity for ZipRealty to consolidate its position in the market. ZipRealty could capitalize on this by acquiring Zillow, but the valuation expectations would not reconcile.

ZipRealty itself is a good acquisition target for newspaper companies like McClatchy (MNI), the New York Times (NYT), or others who have seen real estate ad revenues dwindle. Another player who should be interested in acquiring Zip Realty is Yahoo (YHOO).

Consider the fact that Facebook’s estimated revenues for 2007 is $150 million, and it is valued at $15 billion. ZipRealty has an established business model, an estimated $100 million in revenues and is addressing a $3 billion market, which is growing rapidly.

The stock has a market cap of $122.5 million and even if you pay a premium of 20%, you still end up paying $150 million or 1.5 times sales. That’s dirt cheap, and don’t forget that the online real estate industry is expected to be 32.1% of overall real estate ads by 2010 from the current level of 17.7%.

The stock is hopelessly undervalued, and a perfect opportunity, especially for Yahoo, who should be stitching up its verticals. Waiting too long would lure Mr. Murdoch in!

Comments

[Jimmy CrackCorn]

I agree that ZIPR may be undervalued but it is a broker, not an ad/content play, so I doubt a newspaper would acquire them and compete in the brokerage market with their own advertisers (ie agents). You should understand a company's business model before writing about it.

[Rocktex]

How come, in the article, there is nothing mentioning about "net profit," PE or EPS? Let alone balance sheet.

I am not challenging your position in favor of Ziprealty. But your observation seems not so accurate. By comparison, I will say you are using so-called "gross multifier," in real estate jargon, to evaluate an income property purchase. I believe it would be much safer to use “net multifier”

Agent growth means growth of quantity or market share. It is good to be able to cover more territories. It maybe able to have more utilization of facilities to reduce unit costs. In this perspective, it will be safe for me to say Ziprealty is in a better position than Redfi. Redfi's San Diego operation can NOT even find a local agent in San Gabriel valley, CA to process a "make an offer" submission to get more revenue. However, it keeps sending its update to a prospect as a Santa, while there is nothing for Redfi to gain in the immediate future, except a good public image.

Ziprealty has better coverage, but that does not guarantee better quality service will be given. Certainly, I have no idea to know the connection between its growth and profit growth. Generally both move to the same direction, but it is not always the case. Starbuck gave us a good example showing that both can go different directions in its Q32007.

I won't buy Zip realty if I were Warren Buffet.

[Realtosh]

I guess you're recommending the management team, because Zip has NO PROFITS. Most supposed so-called full-service-but-reduc... real estate companies are bleeding cash. In fact they were bleeding cash during the housing boom. Right now during a housing bust, I wouldn't expect them to do any better. In fact, most are doing quite badly.

On the East Coast, Foxtons just went bankrupt and shut down all operations recently when they were unable to find any suitors for another round of financing to the tune of tens of millions of dollars. They had burned through maybe $50million dollars to try to earn less money per transaction than other non-internet brokerage companies. Guess no one wanted to provide more money for the camp fire.

We gave up on most unprofitable internet companies nearly a decade ago, when the internet stock bubble burst. This housing bust will shake out a lot of poorly thought through business plans in the real estate industry. Do you think ZipRealty has what it takes to become profitable?

I see no reason to own a company without profits and without any reasonable means of reaching profitability. I agree that ZipRealty is undervalued. If there were any reasonable hope of them ever reaching profitability than now would be a great to buy them. Right now would be the time to be buying any good realty company, since they are all undervalued. However, I would want to know that the company would become profitable at some point. As far as I know neither ZipRealty nor RedFin has ever shown profitability, nor do I foresee profitability on the horizon. And at the most basic calculus, what we are buying in a company are its profits. Zip doesn't have any; never did. If they won’t be profitable, then there is no reason to own them, nor is there any reason for anyone else to. So to hope for an acquisition of a company without profits is like hoping to not get stuck with the hot potato.

I do think that the real estate industry is ripe for a metamorphosis. However, I have not yet seen a widespread or highly visible alternative model that can have staying power and sustainable profitability. I have some ideas, but you won’t read about them in a comment on a blog. Ideas for profitability in a $3B marketplace, where others have tried but not achieved, would be discussed in meeting for angel funds or possibly in a second round of financing. The financing for an internally profitable business model would be by definition totally unnecessary and would be considered to grow the model geographically. But internally in each geography the model would have to be profitable to be worth its’ salt. I can’t believe that we are still funding unprofitable internet companies without a plan to reach profitability, in any industry.

[Realtosh]

You mention Murdock, but overlook Diller, Zip would be a good target for IAC and their realestate.com division that is building out a brokerage business.