U.S. housing market may or may not be in the recovery. However, the real estate information companies, i.e. Zillow and Trulia, they have been going strong and are now near their all time high since the inceptions of their IPOs. We would like to see how they have fared for the first half of 2013.
These two stock prices are graphed as follows, according to Yahoo Finance. We can see that they have both jumped more than 80% as compared to their closing prices, as of December 31, 2012. Zillow's stock price has even doubled itself since the beginning of 2013. Is there any room for these two stock prices to grow for the second half of 2013? Let's take a look at Zillow first in this post and then at Trulia subsequently in another.
From financial statement point of view, we can see that Zillow has 58% of total assets tied in cash, cash equivalent, and short term investments, as of March 31, 2013, as compared to 64% of total assets in cash, cash equivalent and short term investments on December 31, 2012. Additionally, long term investment has risen to 8% of total assets, as of March 31, 2013, as compared to 3.10% of total assets on December 31, 2012. A year ago, Zillow had 12.35% of total assets, as of March 31, 2012, as long term investment. However, after a series of mergers and acquisitions initiated by Zillow in 2012, majority of long term investment on March 31, 2012, was cashed out to pay for these acquisitions. We can see the strong emphasis placed by Zillow to expand its platform and services offered via its M&A activity.
Another strong point on its balance sheet is the portion of current liabilities. Zillow keeps a low portion of current liabilities, which is 6% of total assets. There is no long term debt engaged by Zillow, which could be an alternative source of financing in today's low interest rate environment.
On the revenue side, the total sales has been on the rise, even though a bit zigzagging, with a growth rate between 7.5% and 15%. Cost of revenue, on the other hand, has been on the decline since the second half of 2012. However, research development and SGA&E have been weighting in on the profitability, especially the latter one. This is the main reason that operating income has been close to break even point or even slightly in the red. This also shows that Zillow has been expanding itself based on almost entirely the revenue it brought in, at the same time the company has been building up its war chest, i.e. cash position, to prepare for future acquisitions or the economic headwind caused by possible tapering of Fed's bond-buying program.
So is there any more room for Zillow's stock price to go higher? Probably, but the key growth, in our opinion, lies in the growth rate of its Premier Agent subscription.
We can look at the following metric to see the underlying reason of this statement. As evidenced in the profitability ratio, i.e. ROE, ROA, Zillow has demonstrated that it is still in a rapid growth stage by having a low net income. Also, due to the series of different acquisitions in 2012, the growth of assets had outpaced that of revenue so that the ratio between revenue and assets has declined to 38% in 2012, as compared to 57% in 2011 and 127% in 2010. Unique users, however, have been on the rise since two years ago. The ratio between revenue and unique users has been increased as well. Since unique users are defined as " the first time an individual accesses one of Zillow's websites using a web browser during a calendar month, and the first time an individual accesses Zillow's mobile applications using a mobile device during a calendar month", according to its Form 10-K, it actually measures the reach of Zillow's online community. Unique users include both paying and nonpaying customers.
Zillow also has Premier Agent program which has three tiers of service levels and it discloses the total number of subscribers under the Premier Agent subscription. Therefore, if we average the revenue derived from Premier Agent program by the total subscribers, we can know how this program has been contributing to the total revenue. Every Premier Agent subscribers contributed $2,934 in 2012 as compared to $2,676 in 2011, which is almost 10% increase on year-to-year basis.
Bottom Line: The stock price of Zillow has been on a tear since beginning of 2013. However, the continuing momentum awaits the growth rate of Premier Agent subscribers in line with each other to bring up revenue and its stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.