Home Sales And Bank Deals Suggest Upside For Zillow And Trulia

| About: Zillow Group, (Z)
This article is now exclusive for PRO subscribers.

Bank of America's (NYSE:BAC) $11.6 billion settlement with Fannie Mae helps clear a path for lending growth, encouraging short sellers in real estate related plays, such as Zillow (NASDAQ:Z) and Trulia (TRLA) to cover positions.

Regulators also announced an $8.5 billion settlement with ten major banks and mortgage companies over wrongful foreclosure practices.

The two deals mark another step toward normalcy in lending markets, adding confidence credit markets will support housing's next leg higher.

Improving credit markets support real estate plays.

One of the top performers following the news was Zillow, an online real estate portal connecting home buyers with real estate agents and mortgage lenders.

Shares moved up sharply as short sellers covered positions. Sellers were sitting on nearly 11 days of average volume short, an amount equal to 116% of the shares available for trading, as of mid December.

Simlarly, Zillow competitor Trulia, which IPO'd in September, also rallied more than 5%.

As mortgage providers shake off regulatory chains, you can expect lenders will focus on qualifying, issuing and securitizing loans. As competition increases, credit standards will ease and spending on advertising will increase, boosting revenue at online real estate portals.

But, advertising is only one driver of revenue at the Zillow and Trulia.

Both generate the bulk of their sales selling services to real estate agents. And, with housing markets recovering more agents spending more money to attract more home buyers are likely drive those revenues higher too.

Sales are already moving higher at the two companies.

The combination of subscriptions and ad revenue growth boosted Zillow's Q3 sales by 67%. And, analysts are looking for Zillow's earnings to climb 58% in FY13 to $0.49.

Zillow's monthly unique active visitors climbed to 36.1 million in Q3, up from 24.2 million the prior year.

Real estate agents were also increasingly engaged, with 80% more signing up for Zillow's Premier Agent service, a subscription model accounting for 74% of the company's revenue. Ad revenue was up a healthy 15%.

At Trulia, analysts expect the company to post its first full year profit in FY13, with earnings per share of $0.17.

Trulia's monthly unique visitors rose to 23 million in the first 9 months of 2012, up from 14.5 million in the prior year. And, subscribers to Trulia's real estate agent service grew 34% in Q3 year-over-year to 22,763. Combined, the strength pushed Trulia revenue up 76%.

With only 10 million and 13.7 million shares floating at Zillow and Trulia, respectively, any institutional buying could drive shares back toward 52 week highs.

If investors are confident credit markets are going to get increasingly unlocked, it stands we'll see home sales continue higher in 2013.

The higher activity should drive unique visitors to the companies web sites, supporting ad rates and click rates. It should also encourage agents to spend more on marketing, which would likely reward Zillow and Trulia shareholders.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TRLA, Z over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.