Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Real Estate stocks are heating up this winter. The homebuilder ETF (XHB) has increased by nearly 60% this year and dividend rates on REITs have been driven far below 5%, so value investors are now looking for opportunities in adjacent sectors. Timber REITs and agricultural companies with hidden real estate values have already been analyzed in a recent post. Another potential opportunity lies in web and business software companies that support real estate businesses.
Recent public offerings for real estate web companies like HomeAway (AWAY) have fared much better than more headline hogging consumer facing IPO failures like Facebook (FB) and Zynga (ZNGA). The acquisition of the publicly traded Loopnet (LOOP) by CoStar Group (CSGP) for $860 million, a deal that closed earlier this year, also demonstrates that there is significant institutional demand and therefore sustainable value creation in this sector. Since that acquisition in April, CoStar stock has appreciated more than 22%.
An even more spectacular run this year has been the outsized performance of Ellie Mae (ELLI) which has gone from $6 in late January to just about $27 per share this week. This portfolio popper has attracted fans. On October 12, 2012, Brian Schwartz, a Managing Director and Senior Analyst at Oppenheimer & Co. Inc. who covers the SaaS/applications software space, pounded the table for Ellie Mae in an interview with the Wall Street Transcript:
TWST: You have "outperform" ratings on several of your stocks, but which two or three would you point out as best bets for investors at the moment?
Mr. Schwartz: Our top small-cap idea right now is Ellie Mae. We think this business has just a dearth of growth impediments. Right now, they have the recession-resistant ASPs, and we just see lots and lots of greenfield opportunities to grow their business very fast with strong installed, based growth as well as ongoing share gains. And what this means is they have very good visibility into their model and are likely set up to deliver steady ongoing upward revisions to estimates above consensus expectations. We also are a believer in housing recovery, and we think Ellie Mae is really the best software play on housing recovery. So that is one of our top ideas in the small-cap world.
The newly minted IPOs in the web based real estate space are looking to emulate the return multiple that investors got from ELLI this year. The previously mentioned HomeAway is a high growth "rental by owner" business that competes with Silicon Valley darling AirBnB. HomeAway has $300 million in current run rate annual sales, and the company has been rolling up many local and international based web businesses operating in the home rental space. Since its IPO in June of 2011, the Austin, Texas based HomeAway has grown to nearly $2 billion in equity capitalization which must have the venture capitalists in the AirBnB balance sheet licking their thin bloodless lips.
Zilliow (Z) and Trulia (TRLA) are two residential real estate information companies that have recently become publicly traded, Trulia in September of 2012 and its direct competitor Zillow more than a year earlier on July 20, 2011. Both stocks showed an initial surge above their IPO prices but have since come down to earth although Zillow is still above its $20 per share IPO price, while Trulia is right around its $17 per share initial price. As the chart below demonstrates, Zillow roughly doubles Trulia's fully diluted enterprise value. Neither company has been shy about using their new public paper money to make multiple acquisitions. Both are operating around breakeven on a EBITDA basis although Trulia is booking a small net income loss so far this year. Both have roughly similar and massive 75+% revenue growth rates.
Two small cap real estate web companies round out this field, Move.com (MOVE) and ZipRealty (ZIPR). Move.com was a 1999 spin off from Cendant that was sold to Homestore.com but then managed to survive the dot com wash out of 2000 and has grown its business to about $200 million in annual revenues with about $6 million in operating income. The stock is far from cheap at 50 times earnings, especially since top line growth has been missing the last year or so even as the real estate market has revived.
ZipRealty is a interesting potential turnaround story. In a 2009 interview, former CEO Pat Lashinsky highlighted the company's novel lower cost real estate brokerage through web services concept: "First of all, when consumers buy a home with us they get a 20% rebate back of our commission; we do that because we're able to provide for better value than others." Unfortunately, this innovative real estate brokerage and software services website ran afoul of the State of California labor department and was forced to pay $5 million to settle a potential violation of minimum state wage laws. Now that the California labor rights bureaucrats have been pacified the company may have an opportunity for positive developments.
ZIPR has a $75 million equity cap with $20 million in net cash on the balance sheet and about $76 million in run rate revenues, which actually makes it bigger on the top line than Trulia. There is a competitor, private equity darling Redfin, which recently raised $14.8 million in a series "E" round of preferred stock at the end of October in 2011. The multiple rounds of private equity into Redfin, a Seattle, Washington based company, would seem indicate an imminent IPO or attempted exit at an extreme valuation. This in turn may spark some interest in the ZIPR, especially if management can put past mishaps behind and resurrect growth.
| CoStar | HomeAway | Zillow | Elli Mae | Trulia | Move.com | ZipRealty | |
| CSGP | AWAY | Z | ELLI | TRLA | MOVE | ZIPR | |
| Price/Share | $86.64 | $21.60 | $26.48 | $26.94 | $16.59 | $7.33 | $2.89 |
| Equity Cap. | $2.5Bn | $2.0Bn | $1Bn | $800mln | $558mln | $292mln | $74mln |
| Enterprise V | $2.5Bn | $1.7Bn | $790mln | $706mln | $466mln | $261mln | $55mln |
| Est. Revs | $346mln | $282mln | $115mln | $100mln | $66mln | $196mln | $76mln |
| Revs Growth | 35% | 22% | 79% | 96% | 77% | 1% | (16%) |
| Adj. EBIT | $40mln | $45mln | $8mln | $25mln | ($9mln) | $8mln | $1mln |
| EV/Adj.EBIT | 62 | 38 | 104 | 29 | N/A | 35 | 76 |
| EquityCap/NI | 207 | 127 | 132 | 37 | N/A | 53 | N/A |
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