Avoid This Hot Stock

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Company

Zillow (NAS: Z)

Submitted by

jed71

Member Rating

39.11

Submitted on

9/20/2011

Stock Price at Underperform Recommendation

$25.75

Zillow Profile

Star Rating (out of 5)

*

Headquarters

Seattle

Industry

Business services

Market Cap

$702 million

Industry Peers

Move (NAS: MOVE)

Market Leader

ZipRealty

China Real Estate Information (NAS: CRIC)

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This week's pitch:

Having "useful information" or "great data for homeowners" on a website is one thing. Actually leveraging that information to create an income-generating business model is something else entirely. No one is saying the website isn't both functional and useful, but the method by which they are attempting to generate revenue and earnings seems pretty tough to me.

For a stock with a market cap of [$700 million], you would think the company would generate more revenue and sales. For the first two quarters of 2011, they have generated a whopping $27MM in revenues. They also sport a P/B of around [17]. While P/B is not necessarily the best method for valuing a growth company, it gives you a glimpse into how rosy the current shareholders estimate how well a company can use its existing assets to generate future earnings. In this case, the shareholders seem to think Zillow can grow at 20% plus for the foreseeable future (10 years). Somehow I doubt it. They have also shown positive earnings for a whopping one quarter of about $0.06 per share. I just don't think these figures justify the astronomical valuation being assigned to Zillow.

Further, the revenues are generated from what I think are less than reliable sources. They are a subscription service for real estate professionals-I can't think of a group of professionals struggling more than those working in the real estate industry. As everyone knows, home sales are down big and it's questionable whether Zillow will be able to continue to grow revenues under this stream. They also sell advertising to mortgage companies and other firms. This is a very competitive market, in which rates have been driven lower due to the high levels of competition for advertisers on the Internet. Can they continue to grow this segment? Maybe. But I wouldn't be willing to bet on shares as expensive as these. Down thumb for now, until they have proven earnings and revenue streams can grow at a fast clip, in order to justify current valuation.

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At the time this article was published The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, substantive, and made in the past 30 days. Motley Fool newsletter services have recommended buying shares of Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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