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Activist investors critique Zillow, Trulia deal

Valuations skyrocket while earnings expectations have fallen

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While most mainstream Wall Street analysts are generally positive on the pending $3.5 billion Zillow (Z) acquisition of Trulia (TRLA), skeptics of both the operational and valuation elements of the companies and the deal continue to raise questions.

On Monday Housingwire reported on the firebomb critique leveled at the deal by Andrew Left, the contrarian analyst who runs the Citron Report. His critics frequently attack his motivations.

Citron, which is run by a short-seller, has been a longtime critic of Zillow, as noted in other business trade media. This stands to reason as Zillow is one of the most shorted stocks out there, the article in Business Insider claims.

In a report just last month, Citron pointed out that between January 1, 2013, and June 2014, Zillow was up 400%, while at the same time analysts' earnings expectations for 2014 dropped 70%.

When Zillow CEO Spencer Rascoff was questioned on CNBC about those analysts who have raised questions about the firm's high multiple and opaque metrics, Rascoff answered, “Haters gonna hate.”

Zillow responded to Left’s criticism in the HousingWire story on Tuesday, and the story was updated to reflect the company statement.

"Citron is a firm run by a short seller that publishes self-serving propaganda. We don't engage with unethical practices of this type. For balanced and thoroughly researched reports that focus on fundamentals and fact, not fiction, see the attached notes," the statement reads.

Contacted in Greece, Left told HousingWire the attack on his character still didn’t address the allegations in his report.

“That is irrelevant; is the information correct or incorrect? I have uncovered more corporate fraud than anyone in the history of the US. More importantly they have a bias that is greater than my bias. So if Enron (which this is not) was uncovered by a short seller does that make the information untrue?” Left said in an email to HousingWire. “As for unethical practices. Oh so inflating your traffic numbers and having a side deal with the largest realtor in US without describing the financial terms is ethical? As for balanced and thoroughly researched note, looking to Wall Street analysts is not where you go…they are always biased as they want banking fees."

Zillow declined to comment further on statements from Left and the Citron Report. However, Left isn’t the only one with questions about the Zillow/Trulia acquisition.

And questions loom on the stock side of the deal as well as the operational side. The Deal Guy, who is likewise short on Trulia, says it’s a great premium for Trulia shareholders but they should take the money and run.

“While I personally believe this deal has questionable strategic merit, there is one thing I can say with high confidence: current Trulia shareholders should thank the M&A gods for a nice premium and take the money and run,” he writes.

“If you owned Trulia shares, you probably thought the online real estate market was attractive but chose not to own Zillow, the clear market leader, because its valuation was crazy. Guess what; one of tech's most overvalued stocks just increased 19% over three trading days, and you now own it. At $149.87, Zillow trades at the second highest EV / NTM revenue multiple among technology companies with market capitalizations over $1 billion. And doing an admittedly simple pro forma for this transaction (excluding any revenue synergies, if any) does little to change that, as the table below illustrates,” he writes.

Data: Capital IQ

He also questions how viable Trulia’s strategy before the acquisition was, and suggests it wasn’t working, which is why they acquiesced.

Trulia has consistently represented that it views the company as one of a handful of "winners" as the online real estate market consolidates. Much to Wall Street's dismay, the company had recently embarked on a strategy to aggressively ramp marketing expenses to ensure its place in the resultant oligopoly. Why then would the company decide to sell now? An obvious answer is that the early returns from this strategy were lacking. The chart below shows market share of organic search traffic between Zillow, Trulia and Realtor.com (owned by Move) as estimated by SEMrush. Trulia has consistently ceded share to Zillow, whose absurdly high marketing expenses seemed to at least draw more eyeballs.

Click the image to enlarge

“If nothing else, the Zillow/Trulia transaction should make investors fear that such a pricey (and potentially frivolous) deal marks a market top and that it could be a harbinger for the long-anticipated pullback in technology valuations,” he writes.

Nitin Shingate, CEO and co-founder of rentalroost.com, was far more positive on the outlook for Zillow/Trulia, though he did note that it won’t be a road without challenges.

To read the rest of the story, click below.

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