While we consider ourselves disciplined value investors, there are infrequent occasions when we are long stocks that are not what we'd conventionally call cheap. In these special situations, we look for secular and cyclical tailwinds, an inflection in prospective growth that could merit a multiple re-rating, indications of confidence from management (i.e. a buyback) and additional elements that at least somewhat de-risk the investment. We believe that Move Inc. (NASDAQ:MOVE) fits this profile, and we are currently long, with the belief that if our thesis plays out, shares could enjoy 40%-plus upside over the next 6 months.
We first started doing work on Move over a year ago given what we believed was potential for a turnaround in the stock and an improving housing market. Unfortunately we didn't purchase shares. However we revisited the story in early June, thanks to an article on Seeking Alpha by Money Investor. The crux of his argument was that Move is a much cheaper way to play the ongoing growth of online real estate listings than either Zillow (NASDAQ:Z) or Trulia (TRLA), and if Move was priced at the level where competitor Market Leader (NASDAQ:LEDR) was being acquired by Trulia, it would trade at a 140% premium to its then current price of $11.55. In addition, Move had a potential upcoming catalyst via a possible modification of its operating agreement with the National Association of Realtors that could make its main website, Realtor.com, more competitive. This call has been spot-on, including an amended operating agreement (more below) and shares are up 19% since then. However, since the article, shares of Move have actually meaningfully underperformed Trulia and Zillow, which are up 26% and 36%, respectively, creating an even larger multiple disparity.
Move has underperformed peers since June 3rd
With shares of Move currently at $13.76, we expect approximately 40% upside over the next 6 months. Our view is predicated on:
1. The modified operating agreement will accelerate revenues in coming quarters.
2. Move will continue to enjoy cyclical tailwinds.
3. Move will continue to benefit from the secular trend toward online/mobile.
4. Faster growth will result in a modest positive multiple re-rating and a higher stock price.
5. Downside is somewhat mitigated by a low relative multiple, a management that is trying to create value (including via a buyback) and sizable NOLs.
A new era for Realtor.com
The website realtor.com has been a leading real estate website for over a decade, with the most frequently updated data thanks to constantly refreshing MLS feeds. The domain and its data are licensed to Move by the National Association of Realtors (NAR). Despite its strong brand and early market leadership, its popularity has been surpassed in recent years by both Trulia and Zillow. While much of this is attributable to innovation by both Trulia and Zillow, it has also been the result of Move's operating agreement with the NAR.
Under the terms of its agreement with the NAR, Move relied on more than 800 MLS feeds from the Realtor membership for Realtor.com data. It couldn't post listings for non-Realtor listing. It also couldn't list unlisted new homes and communities, nor could it list unlisted properties for rent. In our view, Move was the equivalent of a modern day tennis player competing with a wood racket - simply not equipped to win.
In light of these realities, on July 24th, the 1 million-plus member NAR held a Special Meeting of its Board of Directors in Chicago to discuss possible amendments to its operating agreement. Over 600 members of the 756 member Board attended the meeting, with the overwhelming majority approving the amendments. To give context, this was the first Special Meeting of the NAR since 1996 - clearly they believed there was a problem and doing something substantial to solve it.
According to the realtor.org website:
As a result of today's vote, the RIN board approved amending the operating agreement with RealSelect in three fundamental ways:
- Amending the restriction that says Move may display only listings that have been sourced from REALTOR®-owned and controlled MLSs or from REALTORS®. Under the revised agreement, Move will be able to obtain listings from entities that are not REALTOR®-owned and controlled and from brokers who are not REALTORS®.
- Amending the restriction on unlisted properties. The revised agreement will allow the display of unlisted new homes and new home communities and will allow the display of unlisted properties that are for rent. Individual consumer FSBOs remain precluded from the site.
- Amending the requirement for listing broker's consent for the foreclosure status of a listing to be displayed. Under the revised agreement, unless the listing broker objects, Move/RealSelect will have the ability to identify:
- Properties where notice of default has been recorded
- Auctions of distressed properties
- Short sales
- Bank-owned properties
It is difficult to gauge the magnitude of the impact of this change, although we should get a better sense of it when the company discusses it at length on its 2Q earnings conference call on August 1st. We think it is likely to prove meaningful, but even if it just adds a couple of percent to revenue growth, we think it could dramatically change the perception of Move's growth outlook and help increase Move's multiples at least somewhat closer to its peers.
Move enjoying cyclical tailwinds
Move, much like its peer group, is benefiting from cyclical improvement in real estate markets. The company's Q1 was notable for being the 6th consecutive quarter of sequential revenue growth, and with 14% y/y growth, was the fastest growth quarter for the company in 6 years. Given the continued momentum of real estate markets, including 17 consecutive months of increasing y/y home prices, we expect Move to report at or above the high-end of 2Q revenue guidance of $56-$56.5 million, which would represent 14-15% revenue growth. In our view, if Move can maintain or accelerate its top-line - which we think possible based on the new operating agreement - we'd expect investors to adopt a more favorable view toward Move's growth profile.
Notably Move trades at approximately 2.4x and 2.2x 2013 and 2014 estimated revenues. Both Trulia and Zillow trade at massive premiums to Move.
Move trades at substantial discount to peers
We are aware of concerns regarding slowing among homebuilders, but we believe that in general, with home prices up substantially, inventory low and limited rental vacancies throughout much of the US, there is likely to be sustained strong demand for online real estate sites. Again, should Move demonstrate sustainable growth, we believe it will go a long way to closing the massive valuation gap between it and its peers.
Move will continue to benefit from the secular trend toward online/mobile
In the online real estate segment, there continues to be advertising wallet share moving online and toward mobile (mobile grew 100% y/y for Move in 1Q). Importantly, the segment is not a zero-sum game - that is, Move's growth doesn't necessarily come at the expense of Trulia or Zillow (and vice versa). Just like Ford (NYSE:F) doesn't only advertise on NBC, and TV viewers don't only watch HBO (although they should), advertisers can be customers of Move and its competitors, and consumers can utilize multiple real estate sites. Even real estate professionals might choose paid listings on multiple services. We anticipate the trend to online will continue unabated, and expect that Move will enjoy faster growth and with it, multiple expansion.
It has been instructive to look at trading in Facebook (NASDAQ:FB) in the days since it reported earnings. The sentiment on Facebook changed dramatically, from a single earnings call, adding over $25 billion to its market cap since earnings, as there was a complete revitalization of the growth story.
The point is, in sectors with strong secular tailwinds, multiples can rapidly expand, and sentiment can improve, if a company's growth shows a sign of acceleration. We posit that increasing evidence of growth, following years of stagnation, will cause a material, positive re-rating of Move's valuation multiples.
Management trying to create value
As an investor, we are always looking for managements that are trying to create value for shareholders. Even in our recent article on Harvard Bioscience, in which we are largely critical of management, we must acknowledge, that if management did not care at all about shareholders, they wouldn't go through the effort of a potentially value-creating spin.
In the case of Move, we take it as a very positive sign that they were able to get NAR to hold a special meeting, and then positively modify the operating agreement. It is also very encouraging on the part of NAR. While we don't anticipate Move being acquired in the near-term, given the enormous multiple disparity between it and its peers, it could be bought for well over a 100% premium, and still be massively accretive to either Trulia or Zillow. According to the NAR operating agreement, NAR would have to approve of it. Given NAR's clear desire to have Realtor.com as the leading destination, its willingness to consider a scenario in which Move is acquired is greater than we would have previously anticipated.
It's worth mentioning that the Move has accumulated losses in excess of $900 million, resulting in Net Operating Loss Carryforwards (and equivalents) of over $300 million. Notwithstanding IRC Section 382 limitations, this adds several dollars of value in an acquisition scenario. As a standalone, it would limit taxes for the foreseeable future.
Source: Move Inc. 10-K
Management also implemented a new $20 million repurchase when it reported 1Q. We are uncertain regarding Move's level of activity on the buyback to date, but with in excess of $20 million of free cash flow expected for 2013, and approximately $30 million of net cash on the balance sheet, it certainly has the financial flexibility to implement it
Conclusion - expect multiple expansion
Move competes in a secular growth industry, bolstered by rising tides for the real estate industry. Its peers enjoy enormous valuation multiples and likely represent good shorts when their stories show signs of cracking. The change in the operating agreement may be a truly transformative moment, or it may simply add a few percent to growth. Fortunately, a few percent is all that we think the story needs. If Move can demonstrate that it can produce sustainable growth, there's no reason why shares can't trade up to 3x 2014 revenue, roughly a 70% discount to Zillow, and 40% upside from current prices. Of course, if the change in the operating agreement proves more impactful, there would appear to be a lot more potential for Move to move far higher.
Disclosure: I am long MOVE. 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.
Additional disclosure: We conduct thorough research on our ideas, but our views are our own. Please do your own research.