Can Zillow Keep It Up?

Can Zillow Keep It Up?

Zillow's being bid up like pretty home on a prime lot.

Shares of the fast-growing real estate website operator bucked last week's decline, soaring 11% higher and hitting a new all-time high.

Zillow is one of this year's hottest stocks, up a whopping 248% in 2013. Mortgage applications for new home purchases spiked 14% in July. The latest S&P/Case-Shiller data show that home prices have risen 10% over the past year, and that average bumps up to 12% if we only look at the largest metropolitan cities.

Clearly there is a renewed interest in residential properties, and that's reflecting in huge gains at Zillow and smaller rival Trulia.

Naturally the concern here is that Zillow has gotten ahead of itself.

Despite posting blowout quarterly results early last month, the stock sold off on the news. Zillow shares slid later in the month after a secondary offering and announcing a small acquisition. Despite these events, Zillow's stock still managed to claw all the way back to hit a new high on Thursday.

These are exciting times for the companies that are excelling in serving up information that consumers crave and leads that real estate brokers covet.

Zillow's revenue soared 69% in its latest quarter, and it surprised the market with a small adjusted profit. Trulia's growing even faster -- with revenue up 77% in its latest report -- but Zillow's the eyeball magnet with 61 million unique monthly visitors across its site and several mobile apps. Trulia's drawing an average of 35 million unique users.

Skeptics will argue that as interest rates rise, mortgage applications cool, and price increases subside, Zillow will lose its mojo. Unfortunately, history doesn't agree with that bearish thesis. Zillow actually thrived during the real estate crisis. Real estate brokers need to do more to stand out when times are tight, and that includes keeping their premium subscriptions to Zillow going in order to reach out to potential buyers and sellers.

The valuations certainly aren't for the squeamish here.

Zillow's fetching 179 times next year's earnings. Yes, Zillow's investing a lot of money on growth, but even Zillow's top-line multiple -- trading at 13 times next year's projected revenue -- is steep.

Naysayers are still getting cold feet. The number of Zillow shares sold short has gone from 9.3 million when the year began to just a little more than 5 million now. This may be an encouraging sign, but it also makes it less likely for short squeezes to push the shares even higher in the near term. It wouldn't be a surprise to see Zillow give back some of this year's monstrous gains given the current valuation and bubbly real estate market fundamentals, but we also can't forget that Zillow has managed to thrive on both ends of the realty bubble.

No matter how in demand a home -- or a real estate portal -- may be, it always pays to take the time to perform an appraisal.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Zillow. The Motley Fool owns 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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Originally published