Why Zillow Is Poised to Pull Back
Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, online real estate marketplace operator Zillow has received a distressing two-star ranking.
With that in mind, let's take a closer look at Zillow and see what CAPS investors are saying about the stock right now.
Internet software and services
Co-Founder/Chairman Richard Barton
CEO Spencer Rascoff
Trailing-12-Month Return on Equity
$179.1 million / $0
Sources: S&P Capital IQ and Motley Fool CAPS.
On CAPS, 34% of the 517 members who have rated Zillow believe the stock will underperform the S&P 500 going forward.
Complete insane at nearly 20x revenues. Zillow is a rapidly growing firm and may have a bright future, but too many investors misunderstand the dynamics with the company. Zillow is not like LinkedIn or Netflix . LNKD and NFLX both have high operating leverage, which means that for every dollar of incremental revenue, a very large chunk of that goes to profit. Z is closer to the other end of the spectrum, as it has to spend a considerable amount of money to generate each incremental dollar of revenue.
Given the dynamics with Z, it should sell closer to 3x-5x revenues. That's assuming you buy into the thesis that it's a high-growth company with a good future in the industry (which I think is reasonable, but it's still not a given). That would put its valuation closer to $15-$25; quite a bit below the current price of $75. I think Zillow is extremely overvalued right now.
While you can certainly make quick gains in hot Internet stocks, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report, "3 Stocks That Will Help You Retire Rich," names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
The article Why Zillow Is Poised to Pull Back originally appeared on Fool.com.Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends LinkedIn, Netflix, and Zillow. The Motley Fool owns shares of LinkedIn, Netflix, and 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.