Trulia - 40% First Day Jump Leaves Shares Still Trading At A Discount

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

Trulia (TRLA) made its public debut on Thursday. Shares of the online real estate market place ended their first day up 41% to $24.00 per share.

The public offering

Trulia offers an online market place for home search. The extensive database and friendly user-interface is used by 22.0 million unique visitors in June of 2012. Trulia sold 6.0 million shares for $17.00 a piece. The firm sold 5 million shares in the offering, with selling shareholders selling another 1 million shares. Trulia raised $85 million in gross proceeds in the offering process. Based on the offer price of $17, the firm is valued at $449 million.

The offering is quite a success. Initially the firm and its bankers set an offer price range of $14-$16 per share. In total, the firm and selling shareholders, sold 23% of its shares outstanding. At Thursday's closing price of $24.00, the firm is valued at $590 million. Major banks which brought the company public were J.P. Morgan, RBC Capital Markets, Deutsche Bank, William Blair and Needham & Company.


Trulia operates an online marketplace giving consumers a powerful tool to research homes and neighborhoods. Real estate professionals can market their listings and attract customers. The website attracts more than 22.0 million unique visitors per month. Furthermore 360,000 real estate professionals are active, of which 21,544 have a paid subscription, generating average revenues per user of $140 per month.

The company reported annual revenues of $38.5 million for its annual year of 2011, up 94% on the year before. The company reported a net loss of $6.2 million, compared to a loss of $3.8 million in 2011.

For the first six months of 2012, the company generated revenues of $29.0 million, up 79% compared to 2011. Losses came in at $7.6 million, compared to a loss of $2.6 million in 2011.

The company operates with roughly $10 million in cash and equivalents and a similar amount in debt, as of June 30. Assuming net proceeds of $80 million from the offer process, the net cash position of Trulia would come in around $80 million.

Based on a rough annual revenue estimate of $65 million for 2012, the market values Trulia at 8 times annual revenues, assuming a valuation of operating assets at $510 million. Most likely, the company will continue to lose money for the full year of 2012.

Investment Thesis

After weeks of a public offering drought, the public debut of Trulia was a big success. Shares ended their first day at $24, almost double the initial midpoint of the guided offering range of $15. A lack of offerings in recent weeks and strong equity markets resulted in strong demand. Furthermore, investors are enthusiastic about the strong revenue growth of the company, even as it does not translate into profits in the short term.

Trulia is a competitor of Zillow (Z) whose shares have more than doubled in 2012 alone. Zillow generated annual revenues of $66 million in 2011, on which it earned $1 million. The company is valued at $1.3 billion, or 20 times trailing revenues. This multiple compares to 13 times trailing annual revenues for Trulia. Zillow is already profitable, while Trulia is not expected to generate profits in 2012.

While shares are anything but cheap on a traditional valuation standpoint, the company is only valued at roughly half a billion. Given the massive audience, prospects of good mobile user subscription growth, and strong overall visitor growth, shares might be rather cheap.

For enterprising investors afraid of initiating an outright long position, one could set up a spread trade between Zillow and Trulia. An investor could short Zillow which trades at 20 times trailing annual revenues, after shares have doubled in 2012. Trulia trades at "merely" 13 times trailing revenues, even after Thursday's jump.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.