MOVE shares have really whipped around since the company reported its 2Q06 results on August 3rd: after hitting a new multi-year low of $3.73 on August 14th, the shares have rebounded strongly, rising 42% to close at $5.32 on Friday. And although it is important to note that MOVE shares are (a) extremely volatile and (b) have a history of sudden, massive price movements, a 42% rise is more than enough to warrant a review of the key aspects of our thesis and stock rating.
1. MOVE remains the top pure play investment vehicle vis-à-vis the strong secular growth in online real estate advertising and services. Our positive outlook for the online real estate industry is based on two primary factors: a) rising consumer interest in using the Internet for home researching/buying; b) rising real estate professionals' interest in using the Internet to advertise their listings. Our intraquarter research suggests that both consumers and real-estate professionals are continuing to increase their reliance on the online channel. And a new study by Borrell Associates predicts that online’s penetration of offline will nearly double to 32% by 2010:
Note, however, that MOVE’s traffic advantage over its closest competitors seems to have consistently deteriorated during the course of 2006. To wit, in January, the Move.com network of sites reached 27% of total Internet users – that number fell to 23% in August. Why this apparent deterioration in traffic “reach”? A recent study by Classified Intelligence suggests that although the offline-to-online ad spend trend remains quite strong, the biggest increase in spending has been on realtors’ own web sites, i.e. promotion of their own web sites via various advertising vehicles. According to the results of C.I.’s survey, 17% of respondents (all brokers) have allocated 10% of their 2006 ad budgets to national real estate sites like Move.com; 6% of respondents have allocated 20%. Meanwhile, 26% are spending 10% of their total budget to market their own site and 29% have allocated 20%. We find this discrepancy to be quite noteworthy and believe that it could explain at least part of Move.com’s (and other large, national content aggregation sites) apparent recent traffic troubles. More importantly, it suggests that MOVE may not be as big a beneficiary of the secular offline-to-online ad spend shift as the market currently believes.
3. The execution risk surrounding MOVE’s strategic repositioning continues to cast doubt on when the company’s can achieve consistent GAAP profitability. Back in February, MOVE announced a major strategic repositioning of the company designed to:
• Attract more users via the integration/consolidation of the company’s formerly scattered portfolio of web properties.
• Increase usage and user engagement via the expansion of the company’s listings inventory and service offerings.
• Glean higher rates of revenue per user via new performance-based ad products.
All of the initiatives designed to achieve these goals have now been implemented, making 3Q06 the first quarter on which we will get to judge “Move” rather than “Homestore.” Although we continue to believe that this repositioning will pay off over the long term, it is important to note that some of the changes implemented (such as the introduction of a performance-based pricing model for Featured Listings) were quite major and could cause a lot of disruption for consumers and advertisers alike over the short term. We also note that on its June quarter conference call, management announced a big increase in stock-based compensation expenses for 2H06 ($5MM to $5.5MM in both 3Q06 and 4Q06, double the levels seen in the June quarter). This has, in our view, put MOVE’s chances for a GAAP-profitable 2006 at great risk and constitutes the latest in a long string of expectations resets. We therefore continue to view MOVE as a “show me” stock and would wait for a strong indication that an era consistent GAAP profitability has arrived before buying the shares.
In terms of valuation, we see limited upside to MOVE shares from current levels. On a P/E basis, we apply a 20x multiple (1.2x our long-term growth assumption of 16%) to our 2008 pro forma EPS estimate of $0.29 to yield a target valuation of $5.60. On an EV/EBITDA basis, we apply a 15x multiple (0.7x our long-term growth assumption of 21%) to our 2008 EBITDA per share estimate of $0.36 to yield a target valuation of $5.50.
We reiterate our 3*/Average rating on MOVE shares.
MOVE 1-yr chart: