Shares of Zillow (Z) and Trulia (TRLA) soared 15.25% and 32.43%, respectively, on Thursday’s trade after the news of Zillow taking over Trulia got out. According to Bloomberg, Zillow will shell out as much as $2 billion for the acquisition.
If the deal goes through, Zillow, the number one online real estate information provider in the U.S., will not only strengthen its position but also dwarf competitors such as Move Inc. (MOVE). Moreover, Zillow will have one fewer company to compete with.
The acquisition is also a strategic fit as both the companies offer mobile and web solutions that enable users to find important information about homes. It is worth noting that Zillow and Trulia drove 89% of the total traffic to the 15 most-visited real estate sites in June with unique visitors in excess of 85 million, per comScore.
Moreover, with Trulia in its portfolio Zillow’s scale of business will increase manifold with new listings and expanded reach that will offer significant long-term benefits. Nonetheless, both the companies are in the high investment phase which makes profitability an issue. However, in view of Trulia’s more than 100% year-over-year revenue increase in the past two quarters, Zillow’s bid makes sense.
Another factor that might have prompted Zillow to go for the acquisition is improving home sales. Per National Association of Realtors, U.S. existing home sales jumped in June to an eight-month high.
On a separate note, we believe that the strong traffic growth, frequent product launches and a growing Premier Agent business are the positives for Zillow, going forward.
Moreover, product launches, which include the newly-designed Zillow Real Estate App for Apple's (AAPL) iPhone and iPad and the Zillow Digs app for iPhone are positives. Continuing investments in marketing activities will also boost traffic going forward.
However, these investments will continue to hurt profitability at both companies in the near term. Moreover, Zillow has only $447.0 million in cash & cash equivalents and investments (both short and long term) and it needs to be seen how much cash it parts with for the acquisition.
Currently, Zillow has a Zacks Rank #4 (Sell).
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