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!