(By Kevin Donovan) We recently saw a rental unit in a former multifamily property of ours listed on the Zillow (Z) website and realized we turned it over too soon. But then we thought it's not too late to capture value in this fast-growing real estate advertising company.
A public company for just one year, Zillow has increased revenue over 100% each of the last six quarters. It is expecting that growth to slow in the second quarter to a still remarkable 64% year-over-year based on the midpoint of its guidance range.
That kind of growth comes at a price. Zillow's forward PE is 64 versus about 13 for the S&P 500. Our expectation is that the company's current hefty multiples can be maintained based on growth potential. Applying those multiples to increasing earnings should propel the stock price toward that $60 mark it once touched.
The shares have been on a tear, up 87% year to date at $42.08. Last year the shares were priced at $20 at the initial public offering and quickly spiked to $60. Z has traded as low as $21 in the last year, so it's at the midpoint of the range in its brief life as a public company.
Essentially, we think forward-looking valuation is justified because Zillow is only beginning its penetration of the real estate advertising market, which should flourish as housing continues its recovery. Spencer Rascoff, Zillow CEO, said in a recent interview that he believes home values have bottomed, though the market remains regionally bifurcated with areas like Philadelphia rising and others, such as Atlanta, still depressed.
We think the company is staying ahead of the game by its focus on mobile applications. Indeed, mobile has surpassed website views, and management believes its future lies in the smartphone sector. In March 2012, 155 million homes were viewed on Zillow Mobile, or 57 homes per second. In March 2011, 44 million homes were viewed on Zillow Mobile at a rate of 16 homes per second.
Zillow recently completed the $40 million acquisition of RentJuice, a leading provider of rental relationship management software for landlords, property managers and rental brokers. Rascoff said the acquisition provides the company "with a comprehensive suite of business and marketing services for rental professionals, similar to what took us years to build and grow in our parallel marketplace for real estate agents."
Here's what Zillow accomplished in the first quarter:
• Total revenue increased 103% to $22.8 million from $11.3 million in the first quarter of 2011.
• Marketplace Revenue increased 141% to $16.6 million from $6.9 million.
• Display Revenue increased 42% to $6.2 million from $4.4 million in the first quarter of 2011.
• Net income was $1.7 million, compared to a net loss of $0.8 million in the first quarter of 2011.
• Adjusted EBITDA was $5.4 million, or 24% of revenue, an increase from $1.1 million in the first quarter of 2011, or 9% of revenue.
• Average monthly unique users grew 84% to 31.8 million in the first quarter of 2012 compared to 17.3 million average monthly unique users for the same period in 2011.
For the second quarter, Zillow expects revenue of $25.5-26.5 million vs. $15.8 million in the year-ago quarter, adjusted EBITDA of $3.25-3.75 million, a 13% margin at the mid-point of the range, compared with $3.9 million in the year-ago period.