Citron Crashes Zillow's House Party


With all of the froth building in the online real estate market, it was really just a matter of time before noted worrywart Citron Research ripped into one of the niche's rock stars.

Shares of Zillow (NAS: Z) fell nearly 7% yesterday after a Citron report (link opens PDF) knocked the stock's valuation and its business model.

Yes, Zillow isn't cheap. The same can be said for last week's IPO of Trulia (NYS: TRLA) , a move that helped escalate the values of nearly all of the real estate websites in the neighborhood. Zillow's stock may have moved 6% higher last week, but smaller market laggards ZipRealty and Market Leader (NAS: LEDR) posted weekly pops of 16% and 22%, respectively. parent Move (NAS: MOVE) was the only player to lose ground last week.

Maybe the upticks weren't all warranted, but it was Trulia -- and not Zillow -- that raised the bar on what growing real estate websites should be worth.

Slicing open the lemon
Citron points out how it successfully called out Move and Market Leader several years ago, but that was just around the time when the bubbly real estate market was peaking. One can't compare Zillow -- at a time when the residential home market is starting to recover -- with Move and Market Leader before the housing market collapsed.

Bulls can also argue that it's not fair to compare Zillow to Move and Market Leader because at least Zillow was able to grow briskly even as real estate prices tumbled.

Citron's argument doesn't end there, of course. The report goes on to poke fun of the accuracy of Zillow's Zestimates, the old-school nature of direct telemarketing to real estate agents, and the limited client base.

It's true that Zestimates are rough. It's troublesome to see sales-marketing expenses consume so much of the company's revenue. There are only so many real estate professionals willing to pay for premium access on any dedicated website. As usual, when Citron fires, it aims well.

The insider selling -- above and beyond the recent secondary offering -- isn't comforting.

However, when did it become fashionable to rip into a model while it's still working?

Move-in condition
Citron blasts Zillow's valuation, and that's easy to do for a company that's early in its scalable life cycle. Zillow won't seem cheap at more than 300 times last year's earnings or even 58 times next year's projected profitability, but keep in mind that analysts have consistently underestimated Zillow's profit potential.


Estimated EPS

Actual EPS


Q2 2012




Q1 2012




Q4 2011




Q3 2011




Source: Thomson Reuters.

Zillow isn't just besting the pros. Zillow is blowing those targets out of the water.

So how big is this market? Citron points out how Zillow has just 2.3% of the country's real estate professionals paying to be premier agents on the site. It doesn't see the remaining 97.7% as potential upside, assuming that all of those agents already know about Zillow and have resisted the telemarketer's pitch.

Well, what happens when the real estate market improves? What happens when there are more leads to be had? Do you really think that the entirety of the 97.7% of real estate pros will stay away?

Homeowners and prospective home buyers love Zillow. There are now 33.5 million monthly unique visitors on Zillow, and that's a 61% increase over the past year. As the top draw in mobile, there were 168 million homes viewed on Zillow Mobile for the month of July alone.

Clearly investors are pumped about the investing opportunities in the real estate revival. Homebuilders have been soaring, and that niche leaves out the even larger market of existing home sales. Mortgage industry software speedster Ellie Mae (NYS: ELLI) has been one of this year's biggest winners, up nearly fivefold in 2012.

Arguing that Zillow's gains -- more than doubling off of last year's $20 IPO -- aren't warranted, and that a good chunk of the $6 billion a year spent in marketing real estate through newspapers won't migrate online, seems out of touch with reality.

Zillow isn't cheap, but that doesn't automatically mean that it's expensive.

Zillow has climbed 45% since I recommended it to Rule Breakers newsletter subscribers last year, but there are other opportunities out there.

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Originally published