“This merger will create more opportunities for Zillow/Trulia, as they will be able to execute more ideas quickly and will compete with all MLS boards. Zillow and Trulia are not brokerage companies, though, and getting real-time data from all MLS is quite impossible. They will definitely need to look into this aspect,” Shingate said.
“The biggest advantage to this merger is that their listing coverage now goes up because Zillow and Trulia may each have listings that the other doesn’t. However, Zillow and Trulia’s issue is that realtors are not incentivized to take down their listings once the property is sold,” Shingate said. “This has plagued both sites and the merger isn’t going to solve that. Having said that, there are some unique SEO advantages to operating two websites with a wide array of data and they can feed data back and forth from one another, so their individual data quality should go up.”
Shingate, whose company likewise deals in data on the rental side similar to the two companies, said he wants to see how they leverage their data strength.
“There is a huge difference between data volume and data quality. Given how slow Zillow and Trulia have been at deploying large-scale Big Data applications, I would be curious to see how they can leverage Big Data to improve the quality of their data,” Shingate said. “Real estate data is fairly simplistic and shouldn’t be too difficult to merge datasets. A dedicated data team could likely complete the task in 2 to 3 weeks, if desired.”
Meanwhile, David Trainer at New Constructs raises similar questions as The Deal Guy on the strength of the two companies, saying the deal is a “Hail Mary.”
“Most analysts have hailed the deal as one that will give the combined company massive pricing power and make it the dominant player in online real estate listing. However, analysts have overstated the positives and significantly understated the risks from this acquisition,” he says.
Trainer, who receives no compensation for his coverage of any stock or industry, says that both Zillow and Trulia have had consistently negative free cash flow, which they finance by further diluting their shareholders.
“Between 2011 and 2013, Z increased its total shares outstanding by ~38%. TRLA increased its shares by 34%. Both companies are aggressively diluting shareholders to fund their operating losses,” he says. “Z's acquisition of TRLA is an acceleration of this trend. This acquisition will dilute the stock by a further 40%, and the combined company should, at least at first, burn even more cash. Both companies are already operating at a loss, and acquisition costs in the first year will use up additional cash. Z appears far from done with losing money and diluting investors.”
He says that even if this deal works out as analysts hoped, the profit growth expectations implied by Zillow’s valuation are already tremendous. In order to justify its valuation of $150/share Zillow must earn pre-tax margins of 20%, equivalent to what it earned in 2011, its most profitable year, and grow revenue by 44% compounded annually for 10 years.
Like many fast-growing Internet companies, Trainer notes, Zillow has forgone profits recently in order to achieve revenue growth. In 2013, it spent almost $160 million on the discretionary items “Sales and Marketing” and “Technology and Development”. These two items comprised 80% of revenue.
“Compare this to 2011, when Z spent only 60% of revenue on those two items and managed to earn a 20% pre-tax margin. Essentially, Z’s valuation implies that it will be able to absorb TRLA, scale back spending on marketing and development by 25%, and still grow revenues at a rapid clip,” Trainer says. “Additionally, there’s good reason to believe that Z won’t be nearly as powerful or profitable after the acquisition as analysts are projecting. The companies have acknowledged that combined they still only account for 4% of U.S. real estate marketing spending…”
Trainer is pessimistic.
“It’s entirely possible that Z could complete this acquisition, become a dominant force in real estate, and make shareholders lots of money. Just like it’s possible for a quarterback to run around for 15 seconds, launch a 70-yard bomb into the end zone, and win the game. Sometimes it happens,” he says. “More often, though, something goes wrong.”