Why Zillow Shares Went on Sale Temporarily

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of real estate information marketplace Zillow (NYSE: Z) dove as much as 10% earlier in the trading session Tuesday before recovering more than half of those losses, following an inquiry into the company's reported revenue from the Securities and Exchange Commission.

So what: This one is a little odd since the letter from the SEC is dated Aug. 30, so why it took so long to come to light I'll never quite understand. Specifically, the SEC is questioning why Zillow chose not to report the percentage increase in the average price paid for Premier Agent subscriptions in the latest quarter. The SEC also questioned Zillow with regard to why marketplace revenue is slowing yet Premier Agent subscriptions are rising, and requested that Zillow disclose the number of users across its domain network. Zillow said it would address the first two issues in its next quarterly filing, but could do nothing about the final request regarding domain disclosures.

Now what: It seems that investors are making a big whoop about nothing. Yes, it's never a good thing when the SEC is questioning a company for more information, but it appears Zillow will be more than happy to provide it. The bigger concern for Zillow shareholders should be the company's lofty valuation. Currently, the company is valued at 56 times forward earnings and 10 times book value -- both frothy figures from a company with, what I consider, a low barrier-to-entry in the real estate information sector. This news also comes on the heels of a research report from Citron Research last week that ripped into Zillow. Could this be the start of a trend reversal?

Craving more input? Start by adding Zillow to your free and personalized Watchlist so you can keep up on the latest news with the company.